Attached files
file | filename |
---|---|
EX-31.2 - VANTAGESOUTH BANCSHARES, INC. | v165485_ex31-2.htm |
EX-32.1 - VANTAGESOUTH BANCSHARES, INC. | v165485_ex32-1.htm |
EX-32.2 - VANTAGESOUTH BANCSHARES, INC. | v165485_ex32-2.htm |
EX-31.1 - VANTAGESOUTH BANCSHARES, INC. | v165485_ex31-1.htm |
EX-10.25 - VANTAGESOUTH BANCSHARES, INC. | v165485_ex10-25.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
Quarterly Period Ended September 30,
2009
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO
___________
|
Commission
File Number 000-32951
CRESCENT FINANCIAL
CORPORATION
(Exact
name of registrant as specified in its charter)
NORTH CAROLINA
|
56-2259050
|
(State
or other jurisdiction of Incorporation
|
(IRS
Employer Identification Number)
|
or
organization)
|
1005 HIGH HOUSE ROAD, CARY,
NORTH CAROLINA
27513
(Address
of principal executive offices)
(Zip
Code)
(919)
460-7770
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ¨ No
¨
Indicate
by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definition of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practical date.
Common
Stock, $1.00 par value 9,626,559 shares outstanding as of November 9,
2009
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
TABLE
OF CONTENTS
Page No.
|
|||
Part
I.
|
FINANCIAL
INFORMATION
|
||
Item
1 -
|
Financial
Statements (Unaudited)
|
||
Consolidated
Balance Sheets
|
|||
September
30, 2009 (unaudited) and December 31, 2008
|
3
|
||
Consolidated
Statements of Operations
|
|||
Three
and Nine Months Ended September 30, 2009 and 2008
(unaudited)
|
4
|
||
Consolidated
Statements of Comprehensive Income
|
|||
Three
and Nine Months Ended September 30, 2009 and 2008
(unaudited)
|
5
|
||
Consolidated
Statement of Stockholders’ Equity
|
|||
Nine
Months Ended September 30, 2009 (unaudited)
|
6
|
||
Consolidated
Statements of Cash Flows
|
|||
Nine
Months Ended September 30, 2009 and 2008 (unaudited)
|
7
|
||
Notes
to Consolidated Financial Statements
|
8 -
21
|
||
Item
2 -
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
22
– 39
|
|
Item
3 -
|
Quantitative
and Qualitative Disclosures about Market Risk
|
40
|
|
Item
4T -
|
Controls
and Procedures
|
40
|
|
Part
II.
|
Other
Information
|
||
Item
1 -
|
Legal
Proceedings
|
41
|
|
Item
1a -
|
Risk
Factors
|
41
|
|
Item
2 -
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
41
|
|
Item
3 -
|
Defaults
Upon Senior Debt
|
41
|
|
Item
4 -
|
Submission
of Matters to a Vote of Security Holders
|
41
|
|
Item
5 -
|
Other
Information
|
41
|
|
Item
6 -
|
Exhibits
|
41
|
- 2 -
Part
I. FINANCIAL INFORMATION
Item 1 - Financial
Statements
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
September
30, 2009
|
December
31,
|
|||||||
(Unaudited)
|
2008*
|
|||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 7,841,334 | $ | 9,917,277 | ||||
Interest-earning
deposits with banks
|
4,436,146 | 266,512 | ||||||
Federal
funds sold
|
5,545,000 | 99,000 | ||||||
Investment
securities available for sale, at fair value
|
198,309,418 | 105,648,618 | ||||||
Loans
|
771,996,633 | 785,377,283 | ||||||
Allowance
for loan losses
|
(13,782,000 | ) | (12,585,000 | ) | ||||
NET
LOANS
|
758,214,633 | 772,792,283 | ||||||
Accrued
interest receivable
|
4,255,378 | 3,341,258 | ||||||
Federal
Home Loan Bank stock, at cost
|
11,776,500 | 7,264,000 | ||||||
Bank
premises and equipment, net
|
11,945,611 | 10,845,049 | ||||||
Investment
in life insurance
|
17,444,371 | 16,811,918 | ||||||
Goodwill
|
30,233,049 | 30,233,049 | ||||||
Other
assets
|
13,701,887 | 11,091,784 | ||||||
TOTAL
ASSETS
|
$ | 1,063,703,327 | $ | 968,310,748 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
LIABILITIES
|
||||||||
Deposits
|
||||||||
Demand
|
$ | 66,947,119 | $ | 63,945,717 | ||||
Savings
|
59,973,050 | 58,833,876 | ||||||
Money
market and NOW
|
148,560,074 | 130,542,569 | ||||||
Time
|
438,702,295 | 461,560,593 | ||||||
TOTAL
DEPOSITS
|
714,182,538 | 714,882,755 | ||||||
Short-term
borrowings
|
88,000,000 | 37,706,000 | ||||||
Long-term
borrowings
|
133,748,000 | 116,748,000 | ||||||
Accrued
expenses and other liabilities
|
4,258,075 | 3,882,385 | ||||||
TOTAL
LIABILITIES
|
940,188,613 | 873,219,140 | ||||||
COMMITMENTS
(Note B)
|
||||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Preferred
stock, no par value, 5,000,000 shares authorized, 24,900 shares issued and
outstanding on September 30, 2009
|
22,797,940 | - | ||||||
Common
stock, $1 par value, 20,000,000 shares authorized; 9,626,559 shares
outstanding September 30, 2009 and December 31, 2008
|
9,626,559 | 9,626,559 | ||||||
Common
stock warrants
|
2,367,368 | - | ||||||
Additional
paid-in capital
|
74,483,619 | 74,349,299 | ||||||
Retained
earnings
|
11,297,788 | 10,488,628 | ||||||
Accumulated
other comprehensive income
|
2,941,440 | 627,122 | ||||||
TOTAL
STOCKHOLDERS’ EQUITY
|
123,514,714 | 95,091,608 | ||||||
TOTAL
LIABILITIES AND
|
||||||||
STOCKHOLDERS’
EQUITY
|
$ | 1,063,703,327 | $ | 968,310,748 |
* Derived
from audited consolidated financial statements.
See
accompanying notes.
- 3 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
Three
and Nine Month Periods Ended September 30, 2009 and 2008
Three-month
Periods
|
Nine-month
Periods
|
|||||||||||||||
Ended
September 30,
|
Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
INTEREST
INCOME
|
||||||||||||||||
Loans
|
$ | 11,986,538 | $ | 12,570,944 | $ | 36,089,299 | $ | 36,978,349 | ||||||||
Investment
securities available for sale
|
2,081,011 | 1,206,343 | 6,133,383 | 3,639,786 | ||||||||||||
Federal
funds sold and interest-earning deposits
|
1,014 | 16,763 | 8,349 | 74,971 | ||||||||||||
TOTAL
INTEREST INCOME
|
14,068,563 | 13,794,050 | 42,231,031 | 40,693,106 | ||||||||||||
INTEREST
EXPENSE
|
||||||||||||||||
Deposits
|
4,885,179 | 5,953,339 | 15,196,846 | 17,164,617 | ||||||||||||
Short-term
borrowings
|
507,004 | 125,860 | 1,476,614 | 333,463 | ||||||||||||
Long-term
borrowings
|
1,265,254 | 1,371,992 | 3,646,362 | 4,036,486 | ||||||||||||
TOTAL
INTEREST EXPENSE
|
6,657,437 | 7,451,191 | 20,319,822 | 21,534,566 | ||||||||||||
NET
INTEREST INCOME
|
7,411,126 | 6,342,859 | 21,911,209 | 19,158,540 | ||||||||||||
PROVISION
FOR LOAN LOSSES
|
1,957,526 | 1,281,471 | 4,786,505 | 2,547,178 | ||||||||||||
NET
INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
|
5,453,600 | 5,061,388 | 17,124,704 | 16,611,362 | ||||||||||||
NON-INTEREST
INCOME
|
||||||||||||||||
Mortgage
loan origination revenue
|
223,278 | 188,952 | 735,113 | 511,561 | ||||||||||||
Fees
on deposit accounts
|
423,775 | 414,177 | 1,207,485 | 1,177,331 | ||||||||||||
Earnings
on life insurance
|
225,022 | 188,823 | 660,150 | 431,294 | ||||||||||||
Gain
(loss) on disposal of assets
|
20 | (2,169 | ) | (480 | ) | (1,346 | ) | |||||||||
Gain
on sale of available for sale securities
|
109,777 | - | 109,777 | 15,535 | ||||||||||||
Loss
on impairment of nonmarketable equity security
|
- | - | (406,802 | ) | - | |||||||||||
Other
|
146,573 | 268,973 | 363,774 | 622,907 | ||||||||||||
TOTAL
NON-INTEREST INCOME
|
1,128,445 | 1,058,756 | 2,669,017 | 2,757,282 | ||||||||||||
NON-INTEREST
EXPENSE
|
||||||||||||||||
Salaries
and employee benefits
|
3,030,101 | 2,881,444 | 9,018,527 | 8,602,773 | ||||||||||||
Occupancy
and equipment
|
951,473 | 709,164 | 2,606,593 | 2,027,775 | ||||||||||||
Data
processing
|
358,236 | 269,567 | 1,109,895 | 801,559 | ||||||||||||
FDIC
insurance premiums
|
309,916 | 102,935 | 1,331,504 | 295,403 | ||||||||||||
Other
|
1,237,467 | 1,104,707 | 3,733,934 | 3,527,296 | ||||||||||||
TOTAL
NON-INTEREST EXPENSE
|
5,887,193 | 5,067,817 | 17,800,453 | 15,254,806 | ||||||||||||
INCOME
BEFORE INCOME TAXES
|
694,852 | 1,052,327 | 1,993,268 | 4,113,838 | ||||||||||||
INCOME
TAXES
|
58,100 | 306,300 | 171,800 | 1,336,800 | ||||||||||||
NET
INCOME
|
636,752 | 746,027 | 1,821,468 | 2,777,038 | ||||||||||||
Effective
dividend on preferred stock (Note G)
|
422,443 | - | 1,012,308 | - | ||||||||||||
Net
income available to common shareholders
|
$ | 214,309 | $ | 746,027 | $ | 809,160 | $ | 2,777,038 | ||||||||
NET
INCOME PER COMMON SHARE
|
||||||||||||||||
Basic
|
$ | .02 | $ | .08 | $ | .08 | $ | .29 | ||||||||
Diluted
|
$ | .02 | $ | .08 | $ | .08 | $ | .29 | ||||||||
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING (Note C)
|
||||||||||||||||
Basic
|
9,569,290 | 9,548,589 | 9,569,290 | 9,478,117 | ||||||||||||
Diluted
|
9,606,186 | 9,628,147 | 9,585,422 | 9,642,969 |
See
accompanying notes.
- 4 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three
and Nine Month Periods Ended September 30, 2009 and 2008
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
income
|
$ | 636,752 | $ | 746,027 | $ | 1,821,468 | $ | 2,777,038 | ||||||||
Other
comprehensive income (loss):
|
||||||||||||||||
Securities
available for sale:
|
||||||||||||||||
Unrealized
holding gains (losses) on available for sale securities
|
3,429,112 | (1,221,550 | ) | 4,226,163 | (1,631,094 | ) | ||||||||||
Tax
effect
|
(1,323,950 | ) | 471,706 | (1,631,244 | ) | 629,602 | ||||||||||
Reclassification
of (gains) losses recognized in net income
|
(109,777 | ) | - | (109,777 | ) | (15,535 | ) | |||||||||
Tax
effect
|
42,319 | - | 42,319 | 5,989 | ||||||||||||
Net
of tax amount
|
2,037,704 | (749,844 | ) | 2,527,461 | (1,011,038 | ) | ||||||||||
Cash
flow hedging activities:
|
||||||||||||||||
Unrealized
holding loss on cash flow hedging activities
|
(194,916 | ) | - | (346,857 | ) | - | ||||||||||
Tax
effect
|
74,714 | - | 133,714 | - | ||||||||||||
Net
of tax amount
|
(120,202 | ) | - | (213,143 | ) | - | ||||||||||
Total
other comprehensive income (loss)
|
1,917,502 | (749,844 | ) | 2,314,318 | (1,011,038 | ) | ||||||||||
COMPREHENSIVE
INCOME (LOSS)
|
$ | 2,554,254 | $ | (3,817 | ) | $ | 4,135,786 | $ | 1,766,000 |
See
accompanying notes.
- 5 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
Accumulated
|
||||||||||||||||||||||||||||||||||||
Common
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||||||||||||||
Preferred stock
|
Common stock
|
stock
|
paid-in
|
Retained
|
Comprehensive
|
stockholders’
|
||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
warrants
|
Capital
|
earnings
|
income
|
equity
|
||||||||||||||||||||||||||||
Balance
at December 31, 2008 -
|
$ | - | 9,626,559 | $ | 9,626,559 | $ | - | $ | 74,349,299 | $ | 10,488,628 | $ | 627,122 | $ | 95,091,608 | |||||||||||||||||||||
Net
income
|
- | - | - | - | - | - | 1,821,468 | - | 1,821,468 | |||||||||||||||||||||||||||
Other
comprehensive income
|
- | - | - | - | - | - | - | 2,314,318 | 2,314,318 | |||||||||||||||||||||||||||
Expense
recognized in connection with stock options and
restricted stock
|
- | - | - | - | - | 134,320 | - | - | 134,320 | |||||||||||||||||||||||||||
Preferred
stock transaction:
|
||||||||||||||||||||||||||||||||||||
Issuance
of preferred stock
|
24,900 | 24,900,000 | - | - | - | - | - | - | 24,900,000 | |||||||||||||||||||||||||||
Discount
on preferred stock
|
- | (2,367,368 | ) | - | - | 2,367,368 | - | - | - | - | ||||||||||||||||||||||||||
Accretion
of discount
|
- | 265,308 | - | - | - | - | (265,308 | ) | - | - | ||||||||||||||||||||||||||
Preferred
stock dividend
|
- | - | - | - | - | - | (747,000 | ) | - | (747,000 | ) | |||||||||||||||||||||||||
Balance
at September 30, 2009
|
24,900 | $ | 22,797,940 | 9,626,559 | $ | 9,626,559 | $ | 2,367,368 | $ | 74,483,619 | $ | 11,297,788 | $ | 2,941,440 | $ | 123,514,714 |
See accompanying notes.
- 6 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
Nine
Months Ended September 30, 2009 and 2008
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$ | 1,821,468 | $ | 2,777,038 | ||||
Adjustments
to reconcile net income to net cash provided
|
||||||||
by
operating activities:
|
||||||||
Depreciation
|
690,888 | 585,491 | ||||||
Provision
for loan losses
|
4,786,505 | 2,547,178 | ||||||
Amortization
of core deposit premium
|
100,012 | 100,012 | ||||||
Deferred
income taxes
|
(615,901 | ) | (479,000 | ) | ||||
Loss
on impairment of nonmarketable equity security
|
406,802 | - | ||||||
Gain
on sale of available of sale securities
|
(109,777 | ) | (15,535 | ) | ||||
Loss
on disposal of other real estate owned
|
45,076 | 74,800 | ||||||
(Gain)
loss on disposal of assets
|
480 | 1,346 | ||||||
Net
amortization (accretion) of premiums/discounts on
securities
|
727,295 | (66,910 | ) | |||||
Accretion
of loan discount
|
(146,607 | ) | (329,865 | ) | ||||
Amortization
of deposit premium
|
82,298 | 139,162 | ||||||
Net
increase in cash value of life insurance
|
(632,455 | ) | (394,077 | ) | ||||
Stock
based compensation
|
134,320 | 160,457 | ||||||
Change
in assets and liabilities:
|
||||||||
(Increase)
decrease in accrued interest receivable
|
(914,120 | ) | 433,983 | |||||
(Increase)
in other assets
|
(532,263 | ) | (1,621,266 | ) | ||||
Decrease
(increase) in accrued interest payable
|
(237,213 | ) | 82,915 | |||||
Increase
(decrease) in other liabilities
|
399,763 | 314,062 | ||||||
TOTAL
ADJUSTMENTS
|
4,185,103 | 1,532,753 | ||||||
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
6,006,571 | 4,309,791 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchases
of investment securities available for sale
|
(130,544,840 | ) | (18,911,004 | ) | ||||
Principal
repayments of investment securities available for sale
|
30,635,630 | 10,548,208 | ||||||
Proceeds
from sale of securities available for sale
|
10,743,929 | 1,543,197 | ||||||
Purchase
of Federal Home Loan Bank stock
|
(4,512,500 | ) | (473,300 | ) | ||||
Proceeds
from disposal of foreclosed real estate
|
4,559,220 | 566,790 | ||||||
Net
(increase) decrease in loans
|
1,779,126 | (95,239,479 | ) | |||||
Investment
in life insurance
|
- | (7,000,000 | ) | |||||
Purchases
of bank premises and equipment
|
(1,791,930 | ) | (2,789,271 | ) | ||||
NET
CASH USED BY INVESTING ACTIVITIES
|
(89,131,365 | ) | (111,754,859 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Net
increase (decrease) in deposits:
|
||||||||
Demand
|
3,001,402 | 226,478 | ||||||
Savings
|
1,139,174 | (46,302,557 | ) | |||||
Money
market and NOW
|
18,017,505 | 40,114,210 | ||||||
Time
deposits
|
(22,940,596 | ) | 112,034,601 | |||||
Net
increase in short-term borrowings
|
50,294,000 | 6,245,000 | ||||||
Net
increase in long-term borrowings
|
17,000,000 | 4,500,000 | ||||||
Proceeds
from stock options exercised
|
- | 615,500 | ||||||
Proceeds
from issuance of preferred stock
|
24,900,000 | - | ||||||
Dividends
paid on preferred stock
|
(747,000 | ) | - | |||||
Excess
tax benefits from stock options exercised
|
- | 91,700 | ||||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
90,664,485 | 117,524,932 | ||||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
7,539,691 | 10,079,864 | ||||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
10,282,789 | 12,356,404 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 17,822,480 | $ | 22,436,268 |
See accompanying
notes.
- 7 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
A - BASIS OF PRESENTATION
In
management’s opinion, the financial information, which is unaudited, reflects
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial information as of and for the three and
nine-month periods ended September 30, 2009 and 2008, in conformity with
accounting principles generally accepted in the United States of America. The
financial statements include the accounts of Crescent Financial Corporation (the
“Company”, “we”, “our”, “Crescent”) and its wholly owned subsidiary, Crescent
State Bank (the “Bank”). All significant inter-company transactions
and balances are eliminated in consolidation. Operating results for
the three and nine-month periods ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2009.
The
organization and business of the Company, accounting policies followed by the
Company and other information are contained in the notes to the consolidated
financial statements filed as part of the Company’s 2008 annual report on Form
10-K. This quarterly report should be read in conjunction with such annual
report.
Subsequent
events have been evaluated through November 10, 2009, which is the date of
financial statement issuance.
Prior
period amounts may have been reclassified for proper
presentation. The Company reclassified $2,000 and $75,000 of net
losses on the sale of other real estate owned for the three and nine- month
periods ended September 30, 2008, respectively, from non-interest income to
non-interest expense.
NOTE
B - COMMITMENTS
At
September 30, 2009, commitments are as follows:
Undisbursed
lines of credit
|
$ | 146,890,000 | ||
Stand-by
letters of credit
|
4,049,000 | |||
Undisbursed
commitment to purchase additional investment in Small Business Investment
Corporation
|
363,000 |
NOTE
C - PER SHARE RESULTS
Basic
earnings per share represents income available to common stockholders divided by
the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company
relate to outstanding stock options, restricted stock and the common stock
warrant issued to the US Treasury and are determined using the treasury stock
method.
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Weighted
average number of shares used in computing basic net income per
share
|
9,569,290 | 9,548,589 | 9,569,290 | 9,478,117 | ||||||||||||
Effect
of dilutive stock options
|
36,896 | 79,558 | 16,132 | 164,852 | ||||||||||||
Weighted
average number of shares used in computing diluted net income
per share
|
9,606,186 | 9,628,147 | 9,585,422 | 9,642,969 |
- 8 -
CRESCENT FINANCIAL CORPORATION AND
SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
C - PER SHARE RESULTS (Continued)
Options
and warrants to purchase shares that have been excluded from the determination
of diluted earnings per share because they were antidilutive (the exercise price
is higher than the average current market price for the period) amount to
1,138,482 and 93,163 shares for the three-month periods ended September 30, 2009
and 2008, respectively, and 1,262,717 and 67,029 shares for the nine-month
periods ended September 30, 2009 and 2008, respectively.
NOTE
D - INVESTMENT SECURITIES
The
following is a summary of the securities portfolios by major
classification. All mortgage-backed securities and collateralized
mortgage obligations represent securities issued by a government sponsored
enterprise (i.e. Government National Mortgage Association, Federal Home Loan
Mortgage Corporation or Federal National Mortgage Association) where the
underlying collateral consists of conforming residential home mortgage
loans.
September 30, 2009
|
||||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
unrealized
|
unrealized
|
Fair
|
|||||||||||||
cost
|
gains
|
losses
|
value
|
|||||||||||||
Securities
available for sale:
|
||||||||||||||||
U.S.
government securities and obligations of U.S. government
agencies
|
$ | 16,676,072 | $ | 480,010 | $ | 1,708 | $ | 17,154,374 | ||||||||
Mortgage-backed
|
56,378,994 | 1,947,002 | - | 58,325,996 | ||||||||||||
Collateralized
mortgage obligations
|
76,248,556 | 1,732,676 | 64,380 | 77,916,852 | ||||||||||||
Municipals
|
43,281,539 | 1,405,841 | 137,630 | 44,549,750 | ||||||||||||
Other
equity securities
|
590,678 | - | 228,232 | 362,446 | ||||||||||||
$ | 193,175,839 | $ | 5,565,529 | $ | 431,950 | $ | 198,309,418 |
December 31, 2008
|
||||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
unrealized
|
unrealized
|
Fair
|
|||||||||||||
cost
|
gains
|
losses
|
value
|
|||||||||||||
Securities
available for sale:
|
||||||||||||||||
U.S.
government securities and obligations of U.S. government
agencies
|
$ | 10,664,833 | $ | 169,315 | $ | 2,313 | $ | 10,831,835 | ||||||||
Mortgage-backed
|
67,308,567 | 1,707,655 | 39,863 | 68,976,359 | ||||||||||||
Municipals
|
26,089,420 | 177,788 | 917,537 | 25,349,671 | ||||||||||||
Other
equity securities
|
565,255 | 4,989 | 79,491 | 490,753 | ||||||||||||
$ | 104,628,075 | $ | 2,059,747 | $ | 1,039,204 | $ | 105,648,618 |
Proceeds
from sales of available for sale securities in 2009 totaled $10,743,929
resulting in gross gains of $109,777 and no losses. Proceeds from
sales of available for sale securities in 2008 totaled $1,543,197 resulting in
gross gains of $15,535 and no losses.
- 9 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
D - INVESTMENT SECURITIES (Continued)
The
following tables show investments’ gross unrealized losses and fair values,
aggregated by investment category and length of time that the individual
securities have been in a continuous unrealized loss position, at September 30,
2009 and December 31, 2008. The September 30, 2009 unrealized losses on
investment securities relate to one U.S. Government agency security, six
collateralized mortgage obligations, six municipal securities and two marketable
equity securities. The December 31, 2008 unrealized losses on investment
securities relate to two U.S. Government agency securities, nine mortgage-backed
securities, twenty-six municipal securities and one marketable equity security.
The unrealized losses relate to debt securities that have incurred fair value
reductions due to higher market interest rates since the securities were
purchased. The unrealized losses will reverse at maturity or prior to
maturity if market interest rates decline to levels that existed when the
securities were purchased. Since none of the unrealized losses relate
to the marketability of the securities or the issuer’s ability to honor
redemption obligations, none of the securities are deemed to be other than
temporarily impaired.
September 30, 2009
|
||||||||||||||||||||||||
Less Than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
value
|
losses
|
value
|
losses
|
value
|
losses
|
|||||||||||||||||||
Securities
available for sale:
|
||||||||||||||||||||||||
U.S.
government securities and obligations of U.S. government
agencies
|
$ | 3,406,139 | $ | 1,708 | $ | - | $ | - | $ | 3,406,139 | $ | 1,708 | ||||||||||||
Mortgage-backed
|
- | - | - | - | - | - | ||||||||||||||||||
Collateralized
mortgage Obligations
|
8,630,276 | 64,380 | - | - | 8,630,276 | 64,380 | ||||||||||||||||||
Municipals
|
887,021 | 7,205 | 2,949,443 | 130,425 | 3,836,464 | 137,630 | ||||||||||||||||||
Marketable
equity
|
269,247 | 42,033 | 93,199 | 186,199 | 362,446 | 228,232 | ||||||||||||||||||
Total
temporarily impaired securities
|
$ | 13,192,683 | $ | 115,326 | $ | 3,042,642 | $ | 316,624 | $ | 16,235,325 | $ | 431,950 |
December 31, 2008
|
||||||||||||||||||||||||
Less Than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
value
|
losses
|
value
|
losses
|
value
|
losses
|
|||||||||||||||||||
Securities
available for sale:
|
||||||||||||||||||||||||
U.S.
government securities and obligations of U.S. government
agencies
|
$ | 972,624 | $ | 2,313 | $ | - | $ | - | $ | 972,624 | $ | 2,313 | ||||||||||||
Mortgage-backed
|
1,768,974 | 22,558 | 1,097,179 | 17,305 | 2,866,153 | 39,863 | ||||||||||||||||||
Collateralized
mortgage Obligations
|
- | - | - | - | - | - | ||||||||||||||||||
Municipals
|
13,246,896 | 755,550 | 986,586 | 161,987 | 14,233,482 | 917,537 | ||||||||||||||||||
Marketable
equity
|
- | - | 206,366 | 79,491 | 206,366 | 79,491 | ||||||||||||||||||
Total
temporarily impaired securities
|
$ | 15,988,494 | $ | 780,421 | $ | 2,290,131 | $ | 258,783 | $ | 18,278,625 | $ | 1,039,204 |
- 10 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
D - INVESTMENT SECURITIES (Continued)
At
September 30, 2009 and December 31, 2008, investment securities with a carrying
value of $90,042,111 and $63,602,694, respectively, were pledged to secure
public deposits, borrowings and for other purposes required or permitted by
law.
The
amortized cost and fair values of securities available for sale at September 30,
2009 by expected maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized
|
Fair
|
|||||||
cost
|
value
|
|||||||
Due
within one year
|
$ | 28,771,262 | $ | 29,660,188 | ||||
Due
after one year through five years
|
99,953,380 | 102,541,461 | ||||||
Due
after five years through ten years
|
41,731,300 | 42,850,135 | ||||||
Due
after ten years
|
22,129,219 | 22,895,188 | ||||||
Other
equity securities
|
590,678 | 632,446 | ||||||
$ | 193,175,839 | $ | 198,309,418 |
At
September 30, 2009, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta
stock held by the Company is $11.8 million. On August 12, 2009, FHLB
declared an annualized dividend for the second quarter of 0.84% and announced
that it would continue its previously disclosed practice of not repurchasing
activity-based excess capital stock held by members. The FHLB will
continue to evaluate quarterly whether to repurchase excess
stock. Management believes that its investment in FHLB stock was not
other-than-temporarily impaired as of September 30, 2009 or December 31,
2008. Further, there can be no assurance that the impact of recent or
future legislation on the Federal Home Loan Banks will not also cause a decrease
in the value of the FHLB stock held by the Company.
NOTE
E – DERIVATIVE FINANCIAL INSTRUMENTS
The
Company uses derivative financial instruments, currently in the form of interest
rate swaps, to manage its interest rate risk. These instruments carry varying
degrees of credit, interest rate, and market or liquidity risks. Derivative
instruments are recognized as either assets or liabilities in the accompanying
financial statements and are measured at fair value. Subsequent changes in the
derivatives’ fair values are recognized in earnings unless specific hedge
accounting criteria are met.
Crescent
has established objectives and strategies that include interest-rate risk
parameters for maximum fluctuations in net interest income and market value of
portfolio equity. Interest rate risk is monitored via simulation modeling
reports. The goal of the Company’s asset/liability management efforts is to
maintain profitable financial leverage within established risk parameters.
Crescent has entered into several financial arrangements using derivatives
during 2009 to add stability to interest income and to manage its exposure to
interest rate movements.
- 11 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
E – DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
Cash
Flow Hedges
Through a
special purpose entity (see Note G of Item 8 in Crescent’s 2008 Form 10-K)
the Company issued trust preferred debentures in 2003. In 2007, the
Company entered into a subordinated term loan agreement with a non-affiliated
financial institution. These instruments, as more fully described in
the Note G of Item 8 in the Company’s 2008 Form 10-K, were issued as part of its
capital management strategy. These instruments are variable rate and expose the
Company to interest rate risk caused by the variability of expected future
interest expense attributable to changes in 3-month LIBOR. To mitigate this
exposure to fluctuations in cash flows resulting from changes in interest rates,
the Company entered into four pay-fixed interest rate swap agreements in June
2009.
Based on
the evaluation performed at inception and through the current date, these
derivative instruments qualify for cash flow hedge accounting. Therefore, the
cumulative change in fair value of the interest rate swaps, to the extent that
it is expected to be offset by the cumulative change in anticipated interest
cash flows from the hedged trust preferred debenture and subordinated term loan,
will be deferred and reported as a component of other comprehensive income
(“OCI”). Any hedge ineffectiveness will be charged to current
earnings.
Since the
floating index and reset dates are based on identical terms, management believes
that the hedge relationship of the cumulative changes in expected future cash
flows from the interest rate swaps and the cumulative changes in expected
interest cash flows from the trust-preferred debentures and subordinated term
loan agreement will be highly effective. For the three and nine months ended
September 30, 2009, management has determined that there is no hedge
ineffectiveness.
The
notional amount of the debt obligations being hedged was $15.5 million and the
fair value of the interest rate swap liability, which is recorded in accrued
expenses and other liabilities at September 30, 2009, was an unrealized loss of
$346,857.
The
following table discloses the location and fair value amounts of derivative
instruments designated as hedging instruments under SFAS No. 133 in the
consolidated balance sheets.
September 30, 2009
|
|||||||||
Estimated
Fair
|
|||||||||
Balance
Sheet
|
Notional
|
Value
of
|
|||||||
Location
|
Asset(Liability)
|
Amount
|
|||||||
Trust
preferred securities:
|
|||||||||
Interest
rate swap
|
Other
liabilities
|
$ | 4,000,000 | $ | (75,254 | ) | |||
Interest
rate swap
|
Other
liabilities
|
4,000,000 | (103,362 | ) | |||||
Subordinated
term loan agreements:
|
|||||||||
Interest
rate swap
|
Other
liabilities
|
3,750,000 | (70,922 | ) | |||||
Interest
rate swap
|
Other
liabilities
|
3,750,000 | (97,319 | ) | |||||
$ | 15,500,000 | $ | (346,857 | ) |
See Note
F for additional information.
The
following table discloses activity in accumulated OCI related to the interest
rate swaps during the nine month period ended September 30,
2009.
- 12 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
E – DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
September 30, 2009
|
||||
Accumulated
OCI resulting from interest rate swaps as of January 1, net of
tax
|
$ | - | ||
Other
comprehensive loss recognized during nine month period ended September 30,
net of tax
|
(213,143 | ) | ||
Accumulated
OCI resulting from interest rate swaps as of September 30, net of
tax
|
$ | (213,143 | ) |
The
Company monitors the credit risk of the interest rate swap
counterparty.
NOTE
F - FAIR VALUE MEASUREMENT
Fair
value is a market-based measurement and is defined as the price that would be
received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date. See Note H for
discussion concerning recent guidance for transactions that are not orderly. The
transaction to sell the asset or transfer the liability is a hypothetical
transaction at the measurement date, considered from the perspective of a market
participant that holds the assets or owes the liability. In general, the
transaction price will equal the exit price and, therefore, represent the fair
value of the asset or liability at initial recognition. In determining whether a
transaction price represents the fair value of the asset or liability at initial
recognition, each reporting entity is required to consider factors specific to
the transaction and the asset or liability, the principal or most advantageous
market for the asset or liability, and market participants with whom the entity
would transact in the market. In order to determine the fair value or the exit
price, entities must determine the unit of account, highest and best use,
principal market, and market participants. These determinations allow the
reporting entity to define the inputs for fair value and level of
hierarchy.
Outlined
below is the application of the fair value hierarchy.
Level 1 –
inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. An active market for the
asset or liability is a market in which the transactions for the asset or
liability occur with sufficient frequency and volume to provide pricing
information on an ongoing basis. As of September 30, 2009, the Company carried
certain marketable equity securities at fair value hierarchy Level
1.
Level 2 –
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument. As of September 30, 2009, the types of financial assets
and liabilities the Company carried at fair value hierarchy Level 2 included
securities available for sale, impaired loans secured by real estate and
derivative liabilities.
Level 3 –
inputs to the valuation methodology are unobservable and significant to the fair
value measurement. Unobservable inputs are supported by little or no market
activity or by the entity’s own assumptions. As of September 30, 2009, while the
Company did not carry any financial assets or liabilities, measured on a
recurring basis, at fair value hierarchy Level 3, the Company did value certain
financial assets, measured on a non-recurring basis, at fair value hierarchy
Level 3.
- 13 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
F - FAIR VALUE MEASUREMENT (Continued)
Fair
Value on a Recurring Basis. The Company measures certain assets at
fair value on a recurring basis, as described below.
Investment
Securities Available-for-Sale
Investment
securities available-for-sale are recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices, if available. If quoted
prices are not available, fair values are measured using independent pricing
models or other model-based valuation techniques such as the present value of
future cash flows, adjusted for the security’s credit rating, prepayment
assumptions and other factors such as credit loss assumptions. Level 1
securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2
securities include mortgage-backed securities issued by government sponsored
entities, municipal bonds and corporate debt securities. Securities classified
as Level 3 include asset-backed securities in less liquid markets.
Derivative
Liabilities
Derivative
instruments at September 30, 2009 include interest rate swaps and are valued
using models developed by third-party providers. This type of derivative is
classified as Level 2 within the valuation hierarchy.
The
Company utilizes valuation techniques that maximize the use of observable inputs
and minimize the use of unobservable inputs.
Fair
Value on a Nonrecurring Basis. The Company measures certain assets
and liabilities at fair value on a nonrecurring basis, as described
below.
Loans
The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired and an allowance for loan losses is
established. Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the loan
agreement are considered impaired. The fair value of impaired loans
is estimated using one of several methods, including collateral value, market
value of similar debt, enterprise value, liquidation value and discounted cash
flows. Those impaired loans not requiring an allowance represent loans for which
the fair value of the expected repayments or collateral exceed the recorded
investments in such loans. At September 30, 2009, substantially all of the total
impaired loans were evaluated based on the fair value of the collateral.
Impaired loans where an allowance is established based on the fair value of
collateral require classification in the fair value hierarchy. When the fair
value of the collateral is based on an observable market price or a current
appraised value, the Company records the impaired loan or asset as nonrecurring
Level 2. When current appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company records the impaired loan
or asset as nonrecurring Level 3. There were $40.5 million in
impaired loans at September 30, 2009, of which $22.4 million in loans showed
impairment and had a specific reserve of $5.7 million. Impaired loans
totaled $16.7 million at December 31, 2008. Of such loans, $11.6
million had specific loss allowances aggregating $4.1 million at that
date.
- 14 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
F - FAIR VALUE MEASUREMENT (Continued)
Foreclosed
Real Estate
Foreclosed
assets are adjusted to fair value upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed assets are carried at fair value subject to
future impairment. Fair value is based upon independent market prices, appraised
values of the collateral or management’s estimation of the value of the
collateral. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the foreclosed
asset as nonrecurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below
the appraised value and there is no observable market price, the Company records
the foreclosed asset as nonrecurring Level 3.
Below is
a table that presents information about assets measured at fair value at
September 30, 2009 and December 31, 2008:
Fair Value Measurements at
|
||||||||||||||||||||
September 30, 2009, Using
|
||||||||||||||||||||
Total Carrying
|
||||||||||||||||||||
Amount in The
|
Quoted Prices
|
Significant
|
||||||||||||||||||
Consolidated
|
Assets/(Liabilities)
|
in Active
|
Other
|
Significant
|
||||||||||||||||
Balance
|
Measured at
|
Markets for
|
Observable
|
Unobservable
|
||||||||||||||||
Sheet
|
Fair Value
|
Identical Assets
|
Inputs
|
Inputs
|
||||||||||||||||
Description
|
9/30/2009
|
9/30/2009
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||||
Securities
available for sale:
|
||||||||||||||||||||
U.S.
Government obligations and agency
|
$ | 17,154,374 | $ | 17,154,374 | $ | - | $ | 17,154,374 | $ | - | ||||||||||
Mortgage-backed
|
58,325,996 | 58,325,996 | - | 58,325,996 | - | |||||||||||||||
Collateralized mortgage obligations
|
77,916,852 | 77,916,852 | - | 77,916,852 | - | |||||||||||||||
Municipals
|
44,549,750 | 44,549,750 | - | 44,549,750 | - | |||||||||||||||
Marketable
equity
|
362,446 | 362,446 | 362,446 | - | - | |||||||||||||||
Foreclosed
real estate
|
5,295,562 | 5,295,562 | - | - | 5,295,562 | |||||||||||||||
Impaired
loans
|
16,687,266 | 16,687,266 | - | 15,632,995 | 1,054,271 | |||||||||||||||
Derivative
liabilities
|
(346,857 | ) | (346,857 | ) | - | (346,857 | ) | - |
Fair Value Measurements at
|
||||||||||||||||||||
December 31, 2008, Using
|
||||||||||||||||||||
Total Carrying
|
||||||||||||||||||||
Amount in The
|
Quoted Prices
|
Significant
|
||||||||||||||||||
Consolidated
|
Assets/(Liabilities)
|
in Active
|
Other
|
Significant
|
||||||||||||||||
Balance
|
Measured at
|
Markets for
|
Observable
|
Unobservable
|
||||||||||||||||
Sheet
|
Fair Value
|
Identical Assets
|
Inputs
|
Inputs
|
||||||||||||||||
Description
|
12/31/2008
|
12/31/2008
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||||
Securities
available for sale
|
$ | 105,648,618 | $ | 105,648,618 | $ | 490,753 | $ | 105,157,865 | $ | - | ||||||||||
Foreclosed
real estate
|
1,716,207 | 1,716,207 | - | - | 1,716,207 | |||||||||||||||
Impaired
loans
|
7,556,644 | 7,556,644 | - | 6,787,739 | 768,905 |
- 15 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
F - FAIR VALUE MEASUREMENT (Continued)
ASC Topic
825 Financial Instruments, requires disclosure of fair value information about
financial instruments on an interim basis, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques.
Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instruments. ASC Topic 825 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company. In addition to the valuation methods previously described for
investments available for sale and derivative assets and liabilities, the
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash
and Cash Equivalents
The
carrying amounts for cash and cash equivalents approximate fair value because of
the short maturities of those instruments.
Investment
Securities
Fair
value for investment securities equals quoted market price if such information
is available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans
For
certain homogenous categories of loans, such as residential mortgages, fair
value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. Additional
adjustments are estimated by applying a reasonable discount to reflect the
current market for and illiquid nature of bank loan portfolios.
Federal
Home Loan Bank Stock
The
carrying value of Federal Home Loan Bank stock approximates fair value based on
the redemption provisions of the Federal Home Loan Bank.
Investment
in Life Insurance
The
carrying value of life insurance approximates fair value because this investment
is carried at cash surrender value, as determined by the insurers.
Deposits
The fair
value of demand deposits, savings, money market and NOW accounts is the amount
payable on demand at the reporting date. The fair value of time deposits is
estimated using the rates currently offered for instruments of similar remaining
maturities.
- 16 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
F - FAIR VALUE MEASUREMENT (Continued)
Short-term
Borrowings and Long-term Debt
The fair
value of short-term borrowings and long-term debt are based upon the discounted
value when using current rates at which borrowings of similar maturity could be
obtained.
Accrued
Interest Receivable and Accrued Interest Payable
The
carrying amounts of accrued interest receivable and payable approximate fair
value, because of the short maturities of these instruments.
Derivative
financial instruments
Fair
values for interest rate swaps are based upon the estimated amounts required to
settle the contracts.
The
carrying amounts and estimated fair values of the Company’s financial
instruments, none of which are held for trading purposes, are as follows at
September 30, 2009 and December 31, 2008:
September 30, 2009
|
December 31, 2008
|
|||||||||||||||
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
amount
|
fair value
|
amount
|
fair value
|
|||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 17,822,480 | $ | 17,822,480 | $ | 10,282,789 | $ | 10,282,789 | ||||||||
Investment
securities
|
198,309,418 | 198,309,418 | 105,648,618 | 105,648,618 | ||||||||||||
FHLB
stock
|
11,776,500 | 11,776,500 | 7,264,000 | 7,264,000 | ||||||||||||
Loans,
net
|
758,214,633 | 735,692,000 | 772,792,283 | 784,667,000 | ||||||||||||
Investment
in life insurance
|
17,444,371 | 17,444,371 | 16,811,918 | 16,811,918 | ||||||||||||
Accrued
interest receivable
|
4,255,378 | 4,255,378 | 3,341,258 | 3,341,258 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Deposits
|
714,182,538 | 724,466,000 | 714,882,755 | 718,590,000 | ||||||||||||
Short-term
borrowings
|
88,000,000 | 88,574,000 | 37,706,000 | 39,925,000 | ||||||||||||
Long-term
borrowings
|
133,748,000 | 131,617,000 | 116,748,000 | 121,748,000 | ||||||||||||
Interest
rate swaps
|
346,857 | 346,857 | - | - | ||||||||||||
Accrued
interest payable
|
1,721,131 | 1,721,131 | 1,958,344 | 1,958,344 |
NOTE
G - CUMULATIVE PERPETUAL PREFERRED STOCK
Under the
United States Treasury’s Capital Purchase Program (CPP), the Company issued
$24.9 million in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, on
January 9, 2009. In addition, the Company provided a warrant to the
Treasury to purchase 833,705 shares of the Company’s common stock at an exercise
price of $4.48 per share. These warrants are immediately exercisable
and expire ten years from the date of issuance. The preferred stock
is non-voting, other than having class voting rights on certain matters, and
pays cumulative dividends quarterly at a rate of 5% per annum for the first five
years and 9% per annum thereafter. The preferred shares are
redeemable at the option of the Company subject to regulatory
approval.
Based on
a Black-Scholes option pricing model, the common stock warrants have been
assigned a fair value of $2.28 per share or $2.4 million in the aggregate as of
January 9, 2009. Based on relative fair value, $2.4 million has been
recorded as the discount on the preferred stock and will be accreted as a
reduction in net income available for common shareholders over the next five
years at approximately $0.5 million per year. Correspondingly, $22.5
million was initially assigned to the preferred stock. Through the
discount accretion over the next five years, the preferred stock will be
accreted up to the redemption amount of $24.9 million. For purposes
of these calculations, the fair value of the common stock warrant as of January
9, 2009 was estimated using the Black-Scholes option pricing model and the
following assumptions:
- 17 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
G - CUMULATIVE PERPETUAL PREFERRED STOCK (Continued)
Risk-free
interest rate
|
2.49 | % | ||
Expected
life of warrants
|
10
years
|
|||
Expected
dividend yield
|
0.00 | % | ||
Expected
volatility
|
37.27 | % |
The
Company’s computation of expected volatility is based on daily historical
volatility since January 1999. The risk-free interest rate is based
on the market yield for ten year U.S. Treasury securities as of January 9,
2009.
As a
condition of the CPP, the Company must obtain consent from the United States
Department of the Treasury to repurchase its common stock or to pay a cash
dividend on its common stock. Furthermore, the Company has agreed to
certain restrictions on executive compensation and corporate
governance.
NOTE
H - RECENT ACCOUNTING PRONOUNCEMENTS
In June
2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update No. 2009-01, Generally Accepted Accounting
Principles (ASC Topic 105), which establishes the FASB Accounting
Standards Codification (“the Codification” or “ASC”) as the official single
source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are
superseded. All other accounting guidance not included in the
Codification will be considered non-authoritative. The Codification
also includes all relevant Securities and Exchange Commission (“SEC”) guidance
organized using the same topical structure in separate sections within the
Codification. The Board will not issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts. Instead, it will issue Accounting Standards Updates
(“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our
third-quarter 2009 financial statements and the principal impact on the
Company’s financial statements is limited to disclosures as all future
references to authoritative accounting literature will be referenced in
accordance with the Codification.
In
December 2007, FASB issued ASC 805-10-65 Transition Related to FASB Statement
No. 141 (Revised 2007), Business Combinations (“ASC 805-10-65”), which
establishes principles and requirements for recognition and measurement of
assets, liabilities and any noncontrolling interest acquired due to a business
combination. This guidance expands the definitions of a business and a business
combination, resulting in an increased number of transactions or other events
that will qualify as business combinations. The entity that acquires
the business (the “acquirer”) will record 100 percent of all assets and
liabilities of the acquired business, including goodwill, generally at their
fair values. As such, an acquirer will not be permitted to recognize the
allowance for loan losses of the acquiree. This guidance requires the acquirer
to recognize goodwill as of the acquisition date, measured as a
residual.
- 18 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
H - RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In most
business combinations, goodwill will be recognized to the extent that the
consideration transferred plus the fair value of any noncontrolling interests in
the acquiree at the acquisition date exceeds the fair values of the identifiable
net assets acquired. Acquisition-related transaction and
restructuring costs will be expensed as incurred rather than treated as part of
the cost of the acquisition and included in the amount recorded for assets
acquired. ASC 805-10-65 is effective for fiscal years beginning after
December 15, 2008. The adoption on January 1, 2009, had no effect on the
Company’s consolidated financial statements.
In
December 2007, the FASB issued ASC 810-10-65, Transition Related to FASB Statement
No. 160, Noncontrolling Interests in Consolidated Financial Statements – an
amendment of ARB No. 51 (“ASC 810-10-65”), which defines noncontrolling
interest as the portion of equity in a subsidiary not attributable, directly or
indirectly, to the parent. This guidance requires the ownership interests in
subsidiaries held by parties other than the parent (previously referred to as
minority interest) to be clearly presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity. The
amount of consolidated net income attributable to the parent and to any
noncontrolling interest must be clearly presented on the face of the
consolidated statement of income. Changes in the parent’s ownership interest
while the parent retains its controlling financial interest (greater than 50
percent ownership) are to be accounted for as equity transactions. Upon a loss
of control, any gain or loss on the interest sold will be recognized in
earnings. Additionally, any ownership interest retained will be remeasured at
fair value on the date control is lost, with any gain or loss recognized in
earnings. ASC 810-10-65 is effective for fiscal years beginning after
December 15, 2008. Accordingly, the Company adopted the provisions of this
guidance in the first quarter of 2009. The adoption on January 1, 2009, had no
effect on the Company’s consolidated financial statements.
In
March 2008, the FASB issued ASC 815-10-65, Transition and Effective Date
Related to SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133
(“ASC 815-10-65”), which requires entities to provide greater
transparency about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, results of operations and
cash flows. To meet those objectives, ASC 815-10-65 requires
(1) qualitative disclosures about objectives for using derivatives by
primary underlying risk exposure (e.g., interest rate, credit or foreign
exchange rate) and by purpose or strategy (fair value hedge, cash flow hedge,
net investment hedge, and non-hedges), (2) information about the volume of
derivative activity in a flexible format that the preparer believes is the most
relevant and practicable, (3) tabular disclosures about balance sheet
location and gross fair value amounts of derivative instruments, income
statement and other comprehensive income location of gain and loss amounts on
derivative instruments by type of contract, and (4) disclosures about
credit-risk related contingent features in derivative agreements. ASC 815-10-65
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Accordingly, the Company adopted
the provisions of this guidance in the first quarter 2009. The
Company provided the required disclosure in Note E.
- 19 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
H - RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In
April 2009, the FASB issued the following three FSPs intended to provide
additional application guidance and enhance disclosures regarding fair value
measurements and impairments of securities:
FSP FAS
157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly
(“ASC 820-10-65”), provides additional guidance for estimating fair value
when the volume and level of activity for the asset or liability have decreased
significantly. This update also provides guidance on identifying
circumstances that indicate a transaction is not orderly. The provisions
of this update are effective for the Company’s interim period ending on
June 30, 2009. The adoption of this update did not materially effect
the Company’s consolidated financial statements.
ASC
825-10-65, Transitions Related
to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“ASC 825-10-65”), requires disclosures about
fair value of financial instruments in interim reporting periods of publicly
traded companies that were previously only required to be disclosed in annual
financial statements. ASC 825-10-65 is effective for the Company’s interim
period ending on June 30, 2009. As ASC 825-10-65 amends only the
disclosure requirements about fair value of financial instruments in interim
periods, the adoption did not materially affect the Company’s consolidated
financial statements.
FSP FAS
115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (“ASC 320-10-65”), amends current
other-than-temporary impairment guidance in GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This FSP does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities.
The adoption did not materially effect the Company’s consolidated financial
statements.
In May
2009, the FASB issued ASC 855-10-05 through ASC 855-10-55 (“ASC 855-10”), Subsequent Events, which sets
forth the circumstances under which an entity should recognize events occurring
after the balance sheet date and the disclosures that should be
made. Also, this statement requires disclosure of the date through
which the entity has evaluated subsequent events (for public companies, and
other companies that expect to widely distribute their financial statements,
this date is the date of financial statement issuance, and for nonpublic
companies, the date the financial statements are available to be
issued). The guidance was effective and adopted for the period ended
June 30, 2009.
In June
2009, the FASB issued the following standards:
In June
2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166
“Accounting for Transfers of Financial Assets – an amendment of the FASB
Statement No. 140” (SFAS No. 166). As of September 30, 2009, SFAS No.
166 has not been incorporated within the FASB ASC. SFAS No. 166
eliminates the concept of a qualifying special purpose entity (QSPE), changes
the requirements for derecognizing financial assets, and requires additional
disclosures, including information about continuing exposure to risks related to
transferred financial assets. SFAS No. 166 is effective for financial
asset transfers occurring after the beginning of fiscal years beginning after
November 15, 2009. The disclosure requirements must be applied to
transfers that occurred before and after the effective
date. Management is currently evaluating the effect that the
provisions of SFAS No. 166 may have on the Company's consolidated financial
statements.
- 20 -
CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
Notes
to Consolidated Financial Statements
NOTE
H - RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (SFAS No. 167). As of September 30, 2009, SFAS No. 167 has not
been incorporated within the FASB ASC. SFAS No. 167 contains new criteria for
determining the primary beneficiary, eliminates the exception to consolidating
QSPEs, requires continual reconsideration of conclusions reached in determining
the primary beneficiary, and requires additional disclosures. SFAS
No. 167 effective as of the beginning of fiscal years beginning after November
15, 2009 and is applied using a cumulative effect adjustment to retained
earnings for any carrying amount adjustments (e.g., for newly-consolidated
VIEs). Management is currently evaluating the effect that the
provisions of SFAS No. 167 may have on the Company's consolidated financial
statements.
In August
2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Fair Value Measurements and
Disclosures Overall (ASC Topic 820-10) - “Measuring Liabilities at Fair
Value.” This ASU clarifies the application of certain valuation
techniques in circumstances in which a quoted price in an active market for the
identical liability is not available and clarifies that when estimating the fair
value of a liability, the fair value is not adjusted to reflect the impact of
contractual restrictions that prevent its transfer. The guidance
provided in this ASU becomes effective on October 1, 2009. Management
is currently evaluating the effect that the provisions of this ASU may have on
the Company's consolidated financial statements.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Company’s financial position, results of operations and cash flows.
NOTE
I - GOODWILL IMPAIRMENT
In
accordance with FASB ASC 350-20-35 Goodwill-Subsequent
Measurement (“ASC 350-20-35”), goodwill must be tested for impairment
each year. An impairment test can be performed at any date, as long
as it is consistently used each year. In 2008, the Company changed
its annual testing date from December 31 to October 31. If certain
events occur prior to the annual impairment date, interim impairment tests are
required to be performed. Given the continued trading range of the
Company’s stock price during the first nine months of 2009, management has
re-evaluated and updated the goodwill impairment test quarterly.
In
performing the first step (“step one”) of the goodwill impairment testing and
measurement process to identify possible impairment, we utilized three general
approaches to the valuation: the asset-based approach, the market approach, and
the income approach. The indications of value that resulted from these three
general approaches were then weighted to derive management’s conclusion of
value.
At
September 30, 2009, the results of the step one analysis suggest an indication
of goodwill impairment. The second step (“step two”) of the goodwill
impairment testing has begun, but as of November 13, 2009, the testing has not
been completed. Step two will compare the implied fair value of
goodwill to its carrying value. The conclusion of the analysis will
be the final determination as to whether impairment exists, and if so, to what
extent, which could range up to the entire recorded balance of
goodwill. We expect the test results to be available during the
fourth quarter.
- 21 -
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Management’s
discussion and analysis is intended to assist readers in the understanding and
evaluation of the financial condition and consolidated results of operations of
Crescent Financial Corporation (the “Company”). The analysis includes detailed
discussions for each of the factors affecting Crescent Financial Corporation’s
operating results and financial condition for the periods ended September 30,
2009 and 2008. It should be read in conjunction with the unaudited consolidated
financial statements and accompanying notes included in this report and the
supplemental financial data appearing throughout this discussion and analysis.
Because the Company has no operations and conducts no business on its own other
than owning Crescent State Bank, the discussion contained in this Management's
Discussion and Analysis concerns primarily the business of the Bank. However,
for ease of reading and because the financial statements are presented on a
consolidated basis, the Company and the Bank are collectively referred to herein
as the Company unless otherwise noted. All significant intercompany
transactions and balances are eliminated in consolidation.
COMPARISON
OF FINANCIAL CONDITION AT SEPTEMBER 30, 2009 AND
DECEMBER
31, 2008
Total
assets increased by $95.4 million to $1.1 billion at September 30, 2009 from
$968.3 million at December 31, 2008. Earning assets are $992.1
million or 93% of total assets compared to $898.7 million or 92% at December 31,
2008. Components of earning assets at September 30, 2009 are
$772.0 million in gross loans, $210.1 million in investment securities and
Federal Home Loan Bank (FHLB) stock and $10.0 in overnight investments and
interest–earning deposits with correspondent banks. Earning assets at
December 31, 2008 consisted of $785.4 million in gross loans, $112.9 million in
investment securities and FHLB stock and $366,000 in overnight investments and
interest–earning deposits. Total deposits and stockholders’ equity at September
30, 2009 were $714.2 million and $123.5 million, respectively, compared to
$714.9 million and $95.1 million at December 31, 2008.
Gross
loans outstanding declined by $13.4 million over the first nine months of 2009.
In conjunction with a core data processing conversion occurring in early March,
the Company reclassified certain loans within the portfolio so that reporting is
more consistent with the collateral of a particular loan rather than the
purpose. For instance, loans secured by homes purchased as investment
property or for a commercial business purpose were previously reported as
commercial real estate whereas they are now reported as residential real estate
mortgages. Loans secured by commercial building lots were previously
reported as commercial real estate and are now reported as construction and land
development. Reclassifications of loan types through the conversion
process resulted in $164.6 million of commercial real estate loans and $2.1
million consumer loans being shifted to $81.8 million of construction and land
development, $70.7 million residential mortgages, $9.3 million home equity loans
and $4.9 million commercial and industrial. When considering these
reclassifications, the net growth in the portfolio for 2009, by category, was as
follows: increases in commercial real estate, residential mortgage and consumer
loans of $51.4 million, $5.7 million and $1.6 million, respectively, and
decreases in construction and land development, commercial & industrial
loans and home equity loans and lines of $63.5 million, $7.5 million and $1.2
million, respectively. The composition of the loan portfolio, by category, as of
September 30, 2009 is 46% commercial mortgage loans, 23% construction loans, 12%
residential mortgage loans. 10% commercial loans, 8% home equity loans and
lines, and 1% consumer loans. The composition of the loan portfolio,
by category and as adjusted for the reclassifications, as of December 31, 2008
was 39% commercial mortgage loans, 31% construction loans, 11% residential real
estate mortgage loans, 10% commercial loans, 8% home equity loans and lines and
1% consumer loans.
- 22 -
Loans for
commercial real estate, construction, acquisition and development and land
comprised 69% of the total loan portfolio at September 30, 2009. A
more detailed breakdown of loans in those sectors is presented in the table
below:
Breakdown
of Commercial Real Estate
|
||||
Total Aggregate
|
||||
Exposure
|
||||
Loan Type
|
(in thousands)
|
|||
Non
owner occupied investment property
|
$ | 170,239 | ||
Owner
occupied commercial property
|
165,214 | |||
Multi-family
investment property
|
20,741 | |||
Agriculture/Farmland
|
848 | |||
Other
|
145 | |||
Subtotal
|
357,187 | |||
Deferred
unearned interest
|
(593 | ) | ||
Total
commercial real estate loans
|
$ | 356,594 | ||
Breakdown
of Construction, Acquisition & Development
|
||||
Total Aggregate
|
||||
Exposure
|
||||
Loan Type
|
(in thousands)
|
|||
Land
acquisition and development
|
$ | 133,173 | ||
1
to 4 family residential construction
|
25,083 | |||
Commercial
construction
|
20,986 | |||
Subtotal
|
179,242 | |||
Deferred
unearned interest
|
(161 | ) | ||
Total
construction, acquistition & development
|
$ | 179,081 |
The
Company had an allowance for loan losses at September 30, 2009 of $13.8 million
or 1.79% of outstanding loans compared to $12.6 million or 1.60% at
December 31, 2008. At September 30, 2009, there were seventy
loans totaling $16.5 million in non-accrual status. There were 31
loans totaling $4.9 million related to one-to-four family residential property
including mortgages, home equity loans and lines or construction loans, 13 loans
totaling $7.6 million related to land acquisition and development and 4 loans
totaling $0.8 million related to commercial real estate. The
remaining $3.2 million of non-accrual loans are consumer and commercial and
industrial loans. There were no loans past due 90 days or more still
accruing interest at September 30, 2009. Non-performing loans as a
percentage of total loans at September 30, 2009 were 2.14%. At
December 31, 2008, there were fifty loans totaling approximately $13.1 million
in non-accrual status. Thirty-five of those loans totaling approximately $5.7
million represent one borrowing relationship. As of September 30, 2009, eighteen
of these thirty-five loans had been foreclosed and two of those properties have
been sold. Properties securing three of the non-accrual loans were
sold by the borrower prior to the foreclosure process and twelve loans remain in
non-accrual status. These properties have not been foreclosed on as
the borrower has been engaged in the completion and disposal
process. Of the remaining $7.4 million in non-accruals at December
31, 2008, an additional $4.5 million of loans were to land developers or
residential builders. The remaining $2.9 million of non-accrual loans
were spread between commercial loans and residential investment
properties. The percentage of non-performing loans to total loans at
December 31, 2008 was 1.67%. For a more detailed discussion, see the
section entitled Non-Performing Assets.
- 23 -
The
Company has investment securities with an amortized cost of $193.2 million at
September 30, 2009. All investments are accounted for as available
for sale and are presented at their fair market value of $198.3 million compared
with $105.6 million at year-end 2008. The Company’s investment
securities at September 30, 2009, consist of U.S. Government agency securities,
collateralized mortgage obligations, mortgage-backed securities, municipal bonds
and marketable equity securities. The increase in the available for
sale portfolio during of 2009 was the net result of $130.5 million in new
purchases, a $4.2 million increase in the fair value of the portfolio, less
$30.6 million in principal re-payments and maturities, $10.6 million in sales
and $727,000 in net amortization of premiums. The Company implemented
a leverage strategy to offset the impact on earnings per share anticipated as a
result of having to pay dividends on the investment made by the US Treasury
pursuant to the Capital Purchase Program (CPP). While the funds
received through the CPP have been allocated for the purpose of making loans to
purchasers of completed properties held in inventory by residential construction
customers, an amount equal to the CPP funds was leveraged four times and used to
purchase investment securities. The additional spread earned on the strategy
will offset reduction in earnings per share for common shareholders due to
payment of the preferred dividend.
The
Company owns $11.8 million of Federal Home Loan Bank stock at September 30, 2009
compared to $7.3 million at December 31, 2008. The increase was
required due to the increased level of borrowing necessitated by the leverage
strategy discussed above.
There
were $5.5 million in Federal funds sold at September 30, 2009 compared to
$99,000 at December 31, 2008. The increase in Fed funds sold reflects
on-balance sheet liquidity used to fund loans, redeem maturing deposits and
borrowings and for deposit fluctuations of non-maturing deposit
types.
Interest-earning
deposits held at correspondent banks increased by approximately $4.2 million
from $267,000 at December 31, 2008 to $4.4 million at September 30,
2009. Interest-earning funds held at correspondent bank accounts are
used primarily for the purchase of new investment securities and for other
liquidity purposes.
Non-earning
and other assets increased by approximately $5.3 million between December 31,
2008 and September 30, 2009. Bank premises and equipment had a net
increase of $1.1 million as the Company opened two branch offices during the
second quarter. Amounts representing interest receivable on loans,
securities and other interest-earning assets increased by $914,000 to $4.3
million and non-interest earning cash due from banks, the majority of which
represents checks in the process of being collected through the Federal Reserve
payment system, declined by $2.1 million. For more details regarding
the increase in cash and cash equivalents, see the Consolidated Statement of
Cash Flows.
Other
real estate owned by the Company was $5.3 million at September 30, 2009 compared
with $1.7 million at December 31, 2008. The net increase in other
real estate owned of $3.6 million was comprised of $8.2 million in new
foreclosed property, $4.5 million in proceeds from the sale of properties and
$45,000 in write-downs or losses recognized on the disposals.
Total
deposits decreased by $700,000 between December 31, 2008 and September 30, 2009
from $714.9 million to $714.2 million. The Company has been focusing
its efforts on improving core deposit volumes and introduced a new
interest-bearing checking account that rewards depositors with a higher rate of
interest if they modify their account activity behavior to include more
electronic methods of transactions and statement receipt. As a
result, interest-bearing checking balances have increased by $32.8 million.
Savings account balances have increased by $1.1 million. Money market
account balances have declined by $14.8 million; however, the Company lost one
account in the amount of $14.0 million in January and an escrow account in the
amount of $10.1 million for a denovo financial institution in
April. Time deposit account balances have declined by $22.9 million
over the first nine months of 2009, reflecting a decrease in brokered time
deposits of $37.2 million, which was partially offset by an increase of $14.3
million in other retail time deposits. The renewed focus on
relationships, core deposit generation and a more conservative growth strategy
has resulted in reduced dependence on brokered money.
- 24 -
The
composition of the deposit base, by category, at September 30, 2009 is as
follows: 62% time deposits, 11% interest-bearing demand deposits, 10% money
market, 9% non-interest-bearing demand deposits and 8% statement savings
accounts. The composition of the deposit base, by category, at
December 31, 2008 was 65% time deposits, 12% money market, 9%
non-interest-bearing demand deposits, 8% in statement savings and 6% in
interest-bearing demand deposits. Time deposits of $100,000 or more
totaled $349.0 million at September 30, 2009 compared to $359.3 million at
December 31, 2008. The Company uses brokered certificates of deposit
as an alternative funding source. Brokered deposits represent a
source of fixed rate funds priced competitively with FHLB borrowings, but do not
require collateralization like FHLB borrowings. Brokered deposits
were $218.8 million at September 30, 2009 compared with $256.1 million at
December 31, 2008.
The
Company had total borrowings of $221.7 million at September 30, 2009 compared
with $154.5 million at December 31, 2008. The composition of
borrowings is $118.0 million in long-term advances and $33.0 million in
short-term advances from the Federal Home Loan Bank of Atlanta (FHLB), $55.0
million in Federal Reserve Bank discount window funds, $8.2 million in junior
subordinated debt issued to an unconsolidated subsidiary and $7.5 million in a
subordinated term loan issued to a non-affiliated financial
institution. Borrowings at December 31, 2008 included $99.0 million
in long-term FHLB advances, $29.0 million in short-term FHLB advances, $8.2
million in junior subordinated debt, $7.5 million in a subordinated term loan,
$2.0 million outstanding on a holding company line of credit and $8.7 million in
federal funds purchased.
Accrued
interest payable and other liabilities increased by $376,000 and were $4.3
million and $3.9 million at September 30, 2009 and December 31, 2008,
respectively.
Between
December 31, 2008 and September 30, 2009, total stockholders’ equity increased
by $28.4 million. On January 9, 2009, the Company issued $24.9 million in Fixed
Rate Cumulative Perpetual Preferred Stock, Series A under the US Treasury’s
Capital Purchase Program. In addition, the Company issued a warrant
to purchase 833,705 shares of the Company’s common stock at an exercise price of
$4.48 per share. The warrant is immediately exercisable and expires
ten years from the date of issuance. The preferred stock is
non-voting, other than having class voting rights on certain matters, and pays
cumulative dividends quarterly at a rate of 5% per annum for the first five
years and 9% thereafter. The preferred shares are redeemable at the
option of the Company subject to regulatory approval.
COMPARISON
OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30,
2009 AND 2008
Net Income. Net
income for the three-month period ended September 30, 2009, before adjusting for
the effective dividend on preferred stock, was $637,000 compared to $746,000 for
the prior year three-month period ended September 30, 2008. After adjusting for
$422,000 in dividends and discount accretion on preferred stock, net income
available for common shareholders for the current period was $214,000 or $0.02
per diluted share compared with $0.08 per diluted share for the quarter ended
September 30, 2008. Annualized
return on average assets declined to 0.24% from 0.31% for the prior
period. Earnings in the current period were positively impacted by an
improved net interest margin, which was more than offset by a higher loan loss
provision in response to current economic conditions and an increase in
non-interest operating expenses. Return
on average equity for the current period was 1.89% compared to 4.37% for the
prior period. The decline in return on average equity is due to the
lower level of earnings combined with higher capital from the issuance of the
preferred stock.
- 25 -
Net Interest Income. Net interest
income increased by 17% or $1.1 million from $6.3 million for the prior year
three-month period to $7.4 million for the current period ended September 30,
2009. The increase was attributable to a decrease in interest expense
due to a lower cost of interest-bearing liabilities and the increase in interest
income due to larger volumes of earning assets. The improved cost of funds and a
greater percentage of earning assets to interest-bearing liabilities allowed the
Company’s net interest margin to increase from 2.89% to 2.99%.
Total
interest income increased by 2% or $275,000 to $14.1 million for the current
three-month period compared to $13.8 million for the prior year
period. The net improvement resulted from a $1.3 million increase due
to growth in earning assets and a $1.0 million decrease due to lower yields
realized on those assets. Total interest expense for the current
period declined by $794,000 from $7.5 million to $6.7 million. The
decrease was the net result of a $1.3 million decline due to the lower cost of
funding and a $505,000 increase due to growth in interest-bearing
funds.
Total
average earning assets increased $111.3 million or 13% from an average of $871.7
million to an average of $983.0 million for the current three-month period. The
composition of the increase was as follows: the average balance of loans
outstanding increased by 1% or $6.9 million from $765.5 million to $772.4
million, the average balance of the investment securities portfolio increased by
102% or $104.8 million from $102.8 million to $207.6 million and the average
balance of federal funds sold and other interest-earning assets declined by
$433,000 to $3.0 million from $3.4 million. During the first quarter
of 2009, the Company implemented the leverage strategy previously discussed to
offset the impact on earnings available to common shareholders from paying the
effective dividend on the preferred stock. As a result, the percentage of
average loans to average earning assets for the current period declined by 9
basis points to 79% compared to 88% for the prior period.
Average
interest-bearing liabilities increased by $92.2 million or 12% from $778.5
million for the quarter ended September 30, 2008 to $870.7 million for the
current quarter. Total interest-bearing deposits increased by $12.2
million or 2% from $630.6 million to $642.8 million. Interest-bearing
NOW accounts deposits experienced the largest increase averaging $65.4 million
during the current year period compared to $34.5 million for the prior
period. Total borrowings increased by 54% or $80.0 million from
$147.9 million to $227.9 million. A significant portion of the
increase resulted from the leverage strategy.
Net
interest margin is interest income earned on loans, securities and other earning
assets, less interest expense paid on deposits and borrowings, expressed as a
percentage of total average earning assets. The net interest margin
for the three-month period ended September 30, 2009 was 2.99% compared to 2.89%
for the prior year period. The average yield on earning assets for
the current three-month period decreased 62 basis points to 5.68% compared with
6.30% for the prior year period, while the average cost of interest-bearing
funds decreased by 78 basis points to 3.03% from 3.81%. The interest
rate spread, which is the difference between the average yield on earning assets
and the cost of interest-bearing funds, improved by 15 basis points from 2.49%
to 2.64%. The percentage of interest earning assets to average
interest-bearing liabilities increased from 111.97% for the prior year period to
112.90% for the three months ended September 30, 2009. An increase in
the ratio of average earning assets to average interest-bearing liabilities
indicates a decreased dependency on interest-bearing forms of funding to meet
the demand of asset growth.
Between
September 2007 and April 30, 2008, the Federal Reserve (the “Fed”) cut
short-term interest rates seven times for a total of 325 basis
points. Between October 2008 and December 2008, the Fed cut rates
another 175 basis points for a total of 500 hundred basis points over a
relatively short 15 month period. The interest rate cuts were in response to the
recession experienced in the US economy.
- 26 -
Approximately
44% of the Company’s loan portfolio has variable rate pricing based on the Prime
lending rate or LIBOR (London Inter Bank Offering Rate). The
percentage of variable rate to total loans has declined from 50% at September
30, 2008. As short-term rates have declined, variable rate loans
repriced lower and new loans were made at the lower interest rate
levels. The Company has shifted its strategic focus from a growth
orientation to a more performance-related, relationship
orientation. The Company is being more disciplined with loan pricing
and implementing interest rate floors on variable rate loans when
feasible. As a result, the loan portfolio will not experience the
same growth rates as has been seen in recent years, but should provide better
yields. This should also ease reliance on wholesale forms of
funding. While there is an attempt to focus on local market
relationships, wholesale forms of funding will continue to make more sense from
an economic standpoint at certain times.
The
Company expects that net interest margin will expand in the coming months as
approximately 61% of the time deposit portfolio carrying a weighted average rate
of 3.29% matures in the next year and is subject to being renewed at lower
rates. The Company entered into interest rate swap agreements on $7.5
million subordinated loan agreement and $8.0 million trust preferred
securities. These two borrowings carry variable rates of interest
based on three-month LIBOR. We have swapped these variable cash flows
for fixed rate cash flows for an average period of three and a half
years. In addition to adopting a funding strategy that pushes funding
maturities further out into the future, these swaps will further protect the
Company when rates do begin to rise.
Provision for Loan
Losses. The
Company’s provision for loan losses for the three-month period ended September
30, 2009 was $2.0 million compared to $1.3 million for the same period in
2008. Provision for loan losses is charged to income to bring the
allowance for loan losses to a level deemed appropriate by management based on
factors discussed under “Analysis of Allowance for Loan Losses.” The
increase in the loan loss provision is primarily due to continuing credit
quality issues resulting from the current economic conditions. The allowance for
loan losses was $13.8 million at September 30, 2009, representing 1.79% of total
outstanding loans. See the sections on Nonperforming Assets and
Analysis of Allowance for Loan Losses for additional details.
Non-Interest Income. Non-interest
income increased by $70,000 to $1.1 million. The following categories
experienced increases over the prior period: earnings on cash value of bank
owned life insurance, 19% or $36,000; mortgage loan origination fees, 18% or
$34,000; fees on deposit accounts, 9% or $5,000 and customer service fees
increased by 1% or $4,000. The increase in mortgage loan origination
fee income is attributable to a larger number of loan officers over the past
twelve months and the increase in bank owned life insurance cash value is
attributable to exchanging several older policies into higher yielding
products. During the third quarter of 2008, there was $121,000 of
miscellaneous non-recurring fees included in other non-interest
income. During September 2009, the Company realized a $110,000 gain
on the sale of available for sale securities. We reclassified $2,000
of net losses on the sale of other real estate owned for the three month period
ended September 30, 2008 to other loan collection expenses.
- 27 -
Non-Interest Expenses. For
the current three-month period, non-interest expenses increased by $819,000 or
16% from $5.1 million to $5.9 million. The categories experiencing the greatest
increases were personnel, occupancy, FDIC deposit insurance premium expense and
loan related professional and collection expenses. Total
occupancy expenses have increased by 34% or $242,000 to $951,000 from
$709,000. The Company opened two new facilities during the second
quarter of 2009, one of which serves as our main location for the City of
Raleigh, North Carolina and houses a branch, the Raleigh Commercial Lending
team, our mortgage and investment divisions as well as the human resource staff.
FDIC deposit insurance premiums increased by 201% or $207,000. The
increase reflects the higher insurance assessment rates on deposits. Despite
opening two new offices during the quarter and hiring additional support staff,
total personnel expenses have increased by only 5% or $149,000 to $3.0 million
compared to $2.9 million. Loan and collection expenses have increased
by $114,000 or 172% primarily as a result of expenses related to collections,
foreclosures and losses pursuant to the disposition of assets
acquired. As previously mentioned, $2,000 in losses on the sale of
other real estate was reclassified from non-interest income to non-interest
expense for the three month period ended September 30, 2008.
Provision for Income
Taxes. The
Company recorded income tax expense of $58,000 for the three-months ended
September 30, 2009 compared with $306,000 for the prior year
period. The effective tax rate for the current three-month period was
8.36% compared with 29.11% for the prior year period. The significant
decrease in the effective tax rate is attributable to lower pre-tax income and a
larger percentage of income coming from tax exempt sources in the current
quarter.
- 28 -
COMPARISON
OF RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER
30, 2009 AND 2008
Net Income. Net
income for the nine-month period ended September 30, 2009, before adjusting for
the effective dividend on preferred stock, was $1.8 million compared to $2.8
million for the prior year period. After adjusting for $1.0 million
in dividends and discount accretion on preferred stock, net income available for
common shareholders for the current period was $809,000 or $0.08 per diluted
share compared with $0.29 per diluted share for the quarter ended September 30,
2008. Annualized
return on average assets declined to 0.23% from 0.41% for the prior
period. Earnings in the current period were affected by a declining
net interest margin, higher loan loss provisions due to an increase in credit
quality issues and an increase in non-interest operating expenses. Return
on average equity for the current period was 2.01% compared to 3.94% for the
prior period. The decline in return on average equity is due to the
lower level of earnings combined with higher capital from the issuance of the
preferred stock.
Net Interest Income. Net interest
income increased by 14% or $2.7 million to $21.9 million for the current period
compared to $19.2 million for the prior nine-month period. Increased
interest income from strong growth in earning assets was only partially offset
by the impact of the lower interest rate environment and interest expense
declined as a result of a continued reduction in the cost of interest-bearing
funds.
Total
interest income was $42.2 million for the current period compared to $40.7
million for the prior year period, an increase of $1.5 million or
4%. The increase was comprised of a $5.8 million increase due to
growth in average earning assets and a $4.3 million decrease due to the lower
average yield earned on those assets. Total interest expense declined
by $1.2 million or 6% from $21.5 million for the prior year period to $20.3
million for the current period. The decrease was the net result of a
$4.1 million decrease due to the lower interest rate environment partially
offset by a $2.9 million increase due to growth in interest-bearing
liabilities.
Total
average earning assets increased $154.5 million or 19% from an average of $834.7
million as of September 30, 2008 to an average of $989.2 million as of September
30, 2009. The average balance of loans outstanding during the current
nine-month period was $781.3 million reflecting a $52.4 million or 8% increase
over the $728.9 million for the prior year period. The average balance of the
investment securities portfolio for the current period was $202.6 million,
increasing by $100.7 million or 99% compared to an average of $101.9
million. The average balance of federal funds sold and other earning
assets increased to $5.3 million compared to $3.9 million for the prior
period.
Total
average interest-bearing liabilities increased by $136.7 million or 19% from an
average of $738.2 million for the prior period to $874.9 million for the current
period. Average interest-bearing deposits increased by $45.4 million
or 8% growing from an average of $597.5 million at September 30, 2008 to $642.9
million at September 30, 2009. Total average borrowings increased by
$91.3 million or 65% to $232.0 million from $140.7 million for the prior year
period.
The net
interest margin for the period ended September 30, 2009 was 2.96% compared to
3.07% for the prior year period. The average yield on earning assets
declined 80 basis points to 5.71% compared with 6.51% for the prior year period,
while the average cost of interest-bearing funds decreased by 79 basis points to
3.11% from 3.90%. The spread between the rates paid on earning assets
and the cost of interest-bearing funds decreased by 1 basis points from 2.61% to
2.60%. The percentage of interest earning assets to interest bearing
liabilities was basically unchanged at 113.06% compared to
113.07%.
- 29 -
Provision for Loan
Losses. The
Company’s provision for loan losses for the nine-month period ended September
30, 2009 was $4.8 million compared to $2.5 million for the prior year
period. Provision for loan losses is charged to income to bring the
allowance for loan losses to a level deemed appropriate by management based on
factors discussed under “Analysis of Allowance for Loan Losses.” The
increased loan loss provision for the current period is primarily due to a
decline in credit quality and increased net charge-offs resulting from the
current economic environment. See the section entitled “Non
Performing Assets” for more details. The allowance for loan losses
was $13.8 million at September 30, 2009, representing 1.79% of total outstanding
loans.
Non-Interest Income. For
the current nine-month period, non-interest income decreased by $88,000 to $2.7
million from $2.8 million. The decline in non-interest income is
primarily attributable to transactions within our investment portfolio and
non-recurring revenue recorded in the prior year period. In the
current year, the Company recorded a write-down of $407,000 on a non-marketable
equity security, which was partially offset by a $110,000 realized gain on the
sale of available for sale debt securities, compared with a gain on sale of
$16,000 in the prior year. Several components of non-interest income
have experienced period-over-period increases as follows: $229,000 in earnings
on cash value of bank owned life insurance, $224,000 in mortgage loan
origination fees, $25,000 in customer service fees and $5,000 in service charges
on deposit accounts. The increase in bank owned life insurance cash
value is attributable to exchanging several older policies into higher yielding
products and the increase in mortgage loan origination fee income is
attributable to increasing the number of loan officers over the past twelve
months. During 2008, there were three items totaling $238,000 reported as
non-recurring revenue. Losses on the sale of other real estate owned
amounting to $75,000 in 2008 were reclassified from non-interest income to
non-interest expense.
Non-Interest Expenses. Non-interest
expenses increased by 17% to $17.8 million for the period ended September 30,
2009 compared with $15.3 million for the prior year period. The Company has
added two branch locations and increased support staff during the past twelve
months. The four largest components of non-interest expense,
personnel, occupancy, data processing and FDIC deposit insurance premiums,
represent $14.1 million of total non-interest expenses. Increases in
these four categories accounted for 92% of the increase in non-interest
expenses. Due to changes in the regular quarterly premiums and a
$493,000 special assessment, FDIC deposit insurance premiums increased 351% from
$295,000 to $1.3 million. Occupancy and equipment expenses increased
by $579,000 or 29% from $2.0 million to $2.6 million due to the opening of two
new branch offices during the first half of 2009. Due to the new
offices and the hiring of additional support staff, salaries and benefits
expense increased by 5% or $416,000 from $8.6 million to $9.0
million. The Company converted all data processing platforms in March
2009 and incurred some one-time, non-recurring expenses of $156,000 which was
the partially explains the $308,000 increase in data processing
costs.
Other
non-interest expenses increased by $207,000 to $3.7 million for the first nine
months of 2009 compared with $3.5 million for the prior year. The
largest components of other non-interest expenses include professional fees and
services, office supplies and printing, advertising, and loan related
fees. Management expects that as the complexity and size of the
Company increases, expenses associated with these categories will continue to
increase. As previously mentioned, losses recognized on
the disposal of other real estate owned were $75,000 reclassified from
non-interest income to non-interest expenses for 2008 period.
Provision for Income
Taxes.
The Company recorded income tax expense of $172,000 during the
nine-months ended September 30, 2009 compared to $1.3 million for the prior year
period. The effective tax rates for the two periods were 8.62% and
32.50%, respectively. The decrease is due to a combination of lower
levels of pre-tax income and a larger percentage of income earned from tax
exempt sources in the current six-month period.
- 30 -
NET
INTEREST INCOME
Net
interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (1) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities (“interest rate spread”) and (2) the relative
amounts of interest-earning assets and interest-bearing liabilities (“net
interest-earning balance”). The following tables set forth information relating
to average balances of the Company's assets and liabilities for the three and
nine-month periods ended September 30, 2009 and 2008. The tables reflect the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities (derived by dividing income or expense by the daily
average balance of interest-earning assets or interest-bearing liabilities,
respectively) as well as the net interest margin. In preparing the tables,
non-accrual loans are included, when applicable, in the average loan
balance. For purposes of the analysis, Federal Home Loan Bank stock
is included in Investment Securities totals.
Average
Balances, Interest and Average Yields/Cost
(Dollars
in Thousands)
For
the Three Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
Balance
|
Interest
|
Yield/Cost
|
Balance
|
Interest
|
Yield/Cost
|
|||||||||||||||||||
Interest-earnings
assets
|
||||||||||||||||||||||||
Loan
portfolio
|
$ | 772,419 | $ | 11,987 | 6.16 | % | $ | 765,539 | $ | 12,571 | 6.53 | % | ||||||||||||
Investment
securities
|
207,599 | 2,081 | 4.01 | % | 102,764 | 1,206 | 4.69 | % | ||||||||||||||||
Fed
funds and other interest-earning assets
|
2,987 | 1 | 0.13 | % | 3,420 | 17 | 1.98 | % | ||||||||||||||||
Total
interest-earning assets
|
983,005 | 14,069 | 5.68 | % | 871,723 | 13,794 | 6.30 | % | ||||||||||||||||
Noninterest-earning
assets
|
76,990 | 69,594 | ||||||||||||||||||||||
Total
Assets
|
$ | 1,059,995 | $ | 941,317 | ||||||||||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||||||||||
Interest-bearing
NOW
|
$ | 65,362 | 316 | 1.92 | % | $ | 34,506 | 10 | 0.12 | % | ||||||||||||||
Money
market and savings
|
134,105 | 456 | 1.35 | % | 158,346 | 1,067 | 2.68 | % | ||||||||||||||||
Time
deposits
|
443,337 | 4,113 | 3.68 | % | 437,762 | 4,876 | 4.43 | % | ||||||||||||||||
Short-term
borrowings
|
107,389 | 507 | 1.87 | % | 14,803 | 126 | 3.39 | % | ||||||||||||||||
Long-term
debt
|
120,487 | 1,265 | 4.11 | % | 133,112 | 1,372 | 4.03 | % | ||||||||||||||||
Total
interest-bearing liabilities
|
870,680 | 6,657 | 3.03 | % | 778,529 | 7,451 | 3.81 | % | ||||||||||||||||
Non-interest
bearing deposits
|
63,551 | 64,469 | ||||||||||||||||||||||
Other
liabilities
|
3,268 | 3,495 | ||||||||||||||||||||||
Total
Liabilities
|
937,499 | 846,493 | ||||||||||||||||||||||
Stockholders'
Equity
|
122,496 | 94,824 | ||||||||||||||||||||||
Total
Liabilities & Stockholders' Equity
|
$ | 1,059,995 | $ | 941,317 | ||||||||||||||||||||
Net
interest income
|
$ | 7,412 | $ | 6,343 | ||||||||||||||||||||
Interest
rate spread
|
2.64 | % | 2.49 | % | ||||||||||||||||||||
Net
interest-margin
|
2.99 | % | 2.89 | % | ||||||||||||||||||||
Percentage
of average interest-earning assets to average interest-bearing
liabilities
|
112.90 | % | 111.97 | % |
- 31 -
Average
Balances, Interest and Average Yields/Cost
(Dollars
in Thousands)
For
the Nine Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
Balance
|
Interest
|
Yield/Cost
|
Balance
|
Interest
|
Yield/Cost
|
|||||||||||||||||||
Interest-earnings
assets
|
||||||||||||||||||||||||
Loan
portfolio
|
$ | 781,311 | $ | 36,089 | 6.18 | % | $ | 728,901 | $ | 36,978 | 6.78 | % | ||||||||||||
Investment
securities
|
202,570 | 6,134 | 4.04 | % | 101,916 | 3,640 | 4.76 | % | ||||||||||||||||
Fed
funds and other interest-earning assets
|
5,326 | 8 | 0.20 | % | 3,920 | 75 | 2.56 | % | ||||||||||||||||
Total
earning assets
|
989,207 | 42,231 | 5.71 | % | 834,737 | 40,693 | 6.51 | % | ||||||||||||||||
Noninterest-earning
assets
|
72,136 | 66,405 | ||||||||||||||||||||||
Total
Assets
|
$ | 1,061,343 | $ | 901,142 | ||||||||||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||||||||||
Interest-bearing
NOW
|
$ | 54,085 | 594 | 1.47 | % | $ | 34,727 | 41 | 0.16 | % | ||||||||||||||
Money
market and savings
|
135,555 | 1,427 | 1.41 | % | 158,888 | 3,140 | 2.64 | % | ||||||||||||||||
Time
deposits
|
453,306 | 13,176 | 3.89 | % | 403,903 | 13,984 | 4.63 | % | ||||||||||||||||
Short-term
borrowings
|
110,631 | 1,477 | 1.78 | % | 14,274 | 333 | 3.12 | % | ||||||||||||||||
Long-term
debt
|
121,356 | 3,646 | 3.96 | % | 126,436 | 4,037 | 4.21 | % | ||||||||||||||||
Total
interest-bearing liabilities
|
874,933 | 20,320 | 3.11 | % | 738,228 | 21,535 | 3.90 | % | ||||||||||||||||
Non
interest-bearing deposits
|
62,069 | 65,562 | ||||||||||||||||||||||
Other
liabilities
|
3,092 | 3,138 | ||||||||||||||||||||||
Total
Liabilities
|
940,094 | 806,928 | ||||||||||||||||||||||
Stockholders'
Equity
|
121,249 | 94,214 | ||||||||||||||||||||||
Total
Liabilities & Stockholders' Equity
|
$ | 1,061,343 | $ | 901,142 | ||||||||||||||||||||
Net
interest income
|
$ | 21,911 | $ | 19,158 | ||||||||||||||||||||
Interest
rate spread
|
2.60 | % | 2.61 | % | ||||||||||||||||||||
Net
margin
|
2.96 | % | 3.07 | % | ||||||||||||||||||||
Percentage
of average interest-earning assets to average interest bearing
liabilities
|
113.06 | % | 113.07 | % |
VOLUME/RATE
VARIANCE ANALYSIS
The
following tables analyze the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities for the three and nine-month periods ended
September 30, 2009 and 2008. The table distinguishes between (i)
changes attributable to volume (changes in volume multiplied by the prior
period’s rate), (ii) changes attributable to rate (changes in rate multiplied by
the prior period’s volume), and (iii) net change (the sum of the previous
columns). The change attributable to both rate and volume (changes in
rate multiplied by changes in volume) has been allocated equally to both the
changes attributable to volume and the changes attributable to
rate.
- 32 -
Rate/Volume
Analysis
Three
Months Ended September 30,
|
||||||||||||
2009
vs. 2008
|
||||||||||||
(in
Thousands)
|
||||||||||||
Increase
(Decrease) Due to
|
||||||||||||
Volume
|
Rate
|
Total
|
||||||||||
Interest Income
|
||||||||||||
Loan
portfolio
|
127 | (711 | ) | (584 | ) | |||||||
Investment
Securities
|
1,146 | (271 | ) | 875 | ||||||||
Fed
funds and other interest-earning assets
|
(1 | ) | (15 | ) | (16 | ) | ||||||
Total
interest-earning assets
|
1,272 | (997 | ) | 275 | ||||||||
Interest Expense
|
||||||||||||
Interest-bearing
NOW
|
79 | 227 | 306 | |||||||||
Money
market and savings
|
(122 | ) | (489 | ) | (611 | ) | ||||||
Time
deposits
|
64 | (827 | ) | (763 | ) | |||||||
Short-term
borrowings
|
614 | (233 | ) | 381 | ||||||||
Long-term
debt
|
(130 | ) | 23 | (107 | ) | |||||||
Total
interest-bearing liabilities
|
505 | (1,299 | ) | (794 | ) | |||||||
Net
interest income
|
767 | 302 | 1,069 |
Rate/Volume
Analysis
Nine
Months Ended September 30,
|
||||||||||||
2009
vs. 2008
|
||||||||||||
(in
Thousands)
|
||||||||||||
Increase
(Decrease) Due to
|
||||||||||||
Volume
|
Rate
|
Total
|
||||||||||
Interest Income
|
||||||||||||
Loan
portfolio
|
2,522 | (3,411 | ) | (889 | ) | |||||||
Investment
Securities
|
3,316 | (822 | ) | 2,494 | ||||||||
Fed
funds and other interest-earning assets
|
15 | (82 | ) | (67 | ) | |||||||
Total
interest-earning assets
|
5,853 | (4,315 | ) | 1,538 | ||||||||
Interest Expense
|
||||||||||||
Interest-bearing
NOW
|
118 | 435 | 553 | |||||||||
Money
market and savings
|
(355 | ) | (1,358 | ) | (1,713 | ) | ||||||
Time
deposits
|
1,566 | (2,374 | ) | (808 | ) | |||||||
Short-term
borrowings
|
1,766 | (622 | ) | 1,144 | ||||||||
Long-term
debt
|
(165 | ) | (226 | ) | (391 | ) | ||||||
Total
interest-bearing liabilities
|
2,930 | (4,145 | ) | (1,215 | ) | |||||||
Net
interest income
|
2,923 | (170 | ) | 2,753 |
- 33 -
NONPERFORMING
ASSETS
The table
below sets forth, for the periods indicated information about our nonaccrual
loans, restructured loans, total nonperforming loans, and total nonperforming
assets.
At September 30,
|
At December 31,
|
|||||||||||||||
2009
|
2008
|
2008
|
2007
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Nonaccrual
loans
|
$ | 16,540 | $ | 2,771 | $ | 13,094 | $ | 2,726 | ||||||||
Accruing
loans past due 90 days or more
|
- | - | - | - | ||||||||||||
Total
nonperforming loans
|
16,540 | 2,771 | 13,094 | 2,726 | ||||||||||||
Real
estate owned
|
5,296 | 1,870 | 1,716 | 272 | ||||||||||||
Repossessed
assets
|
2 | - | - | - | ||||||||||||
Total
nonperforming assets
|
$ | 21,838 | $ | 4,641 | $ | 14,810 | $ | 2,998 | ||||||||
Restructured
loans not in categories listed above
|
$ | 9,525 | $ | - | $ | - | $ | - | ||||||||
Allowance
for loan losses
|
13,782 | 9,988 | 12,585 | 8,273 | ||||||||||||
Nonperforming
loans to period end loans
|
2.14 | % | 0.36 | % | 1.53 | % | 0.40 | % | ||||||||
Allowance
for loan losses to period end loans
|
1.79 | % | 1.30 | % | 1.60 | % | 1.22 | % | ||||||||
Allowance
for loan losses to nonperforming loans
|
83 | % | 360 | % | 96 | % | 303 | % | ||||||||
Nonperforming
assets to total assets
|
2.05 | % | 0.49 | % | 1.67 | % | 0.36 | % | ||||||||
Nonperforming
assets and loans past due 90 days or more to total
assets
|
2.05 | % | 0.49 | % | 1.67 | % | 0.36 | % |
Our
financial statements are prepared on the accrual basis of accounting, including
the recognition of interest income on loans, unless we place a loan on
nonaccrual basis. We account for loans on a nonaccrual basis when we
have serious doubts about the collectability of principal or
interest. Generally, our policy is to place a loan on nonaccrual
status when the loan becomes past due 90 days. We also place loans on
nonaccrual status in cases where we are uncertain whether the borrower can
satisfy the contractual terms of the loan agreement. Amounts received
on nonaccrual loans generally are applied first to principal and then to
interest only after all principal has been collected. Restructured
loans are those for which concessions, including the reduction of interest rates
below a rate otherwise available to that borrower or the deferral of interest or
principal have been granted due to the borrower’s weakened financial
condition. We accrue interest on restructured loans at the
restructured rates when we anticipate that no loss of original principal will
occur. Potential problem loans are loans which are currently
performing and are not included as nonaccrual or restructured loans above, but
about which we have serious doubts as to the borrower’s ability to comply with
present repayment terms. These loans are likely to be included later
in nonaccrual, past due or restructured loans, so they are considered by our
management in assessing the adequacy of our allowance for loan
losses. At September 30, 2009, we identified thirty-three loans
totaling $8.4 million as potential problems loans. Of the $8.4
million in potential problem loans, seventeen loans totaling $7.5 million are
concentrated in the residential construction and land acquisition and
development sectors. There were thirty-two foreclosed properties valued at a
total of $5.3 million and seventy nonaccrual loans totaling $16.5
million. Foreclosed property is valued at the lower of appraised
value or the outstanding loan balance. Interest foregone on nonaccrual and
charged-off loans for the nine-month period ended September 30, 2009 was
$722,000. There are thirteen loans totaling $9.5 million that are considered
troubled debt restructurings. These loans are all in accrual status
earning interest at the modified rate.
- 34 -
At
September 30, 2008, there were seven foreclosed properties valued at a total of
$1.9 million and eight nonaccrual loans totaling $2.8
million. Interest foregone on nonaccrual loans for the nine-month
period ended September 30, 2008 was $115,000. At September 30, 2007, there were
six foreclosed properties valued at $249,000 and eleven nonaccrual loans
totaling $1.4 million. Interest foregone on nonaccrual loans
for the nine-month period ended September 30, 2007 was approximately $45,100.
There were no troubled debt restructurings at September 30, 2008.
ANALYSIS
OF ALLOWANCE FOR LOAN LOSSES
The
allowance for loan losses is established through periodic charges to earnings in
the form of a provision for loan losses. Increases to the allowance
for loan losses occur as a result of provisions charged to operations and
recoveries of amounts previously charged-off, and decreases to the allowance
occur when loans are charged-off. Management evaluates the adequacy
of our allowance for loan losses on a monthly basis. The evaluation
of the adequacy of the allowance for loan losses involves the consideration of
loan growth, loan portfolio composition and industry diversification, historical
loan loss experience, current delinquency levels, adverse conditions that might
affect a borrower’s ability to repay the loan, estimated value of underlying
collateral, prevailing economic conditions and all other relevant factors
derived from our history of operations. Additionally, as an important
component of their periodic examination process, regulatory agencies review our
allowance for loan losses and may require additional provisions for estimated
losses based on judgments that differ from those of management.
We use an
internal grading system to assign the degree of inherent risk on each individual
loan. The grade is initially assigned by the lending officer and
reviewed by the loan administration function. The internal grading
system is reviewed and tested periodically by an independent third party credit
review firm. The testing process involves the evaluation of a sample
of new loans, loans having been identified as possessing potential weakness in
credit quality, past due loans and nonaccrual loans to determine the ongoing
effectiveness of the internal grading system. The loan grading system
is used to assess the adequacy of the allowance for loan losses.
Management
has developed a model for evaluating the adequacy of the allowance for loan
losses. The model uses the Company’s internal loan grading system to
segment each category of loans by risk class. The Company’s internal grading
system is compromised of nine different risk classifications. Loans
possessing a risk class of 1 through 6 demonstrate various degrees of risk, but
each is considered to have the capacity to perform in accordance with the terms
of the loan. Loans possessing a risk class of 7 to 9 are considered
impaired and are individually evaluated for impairment. Additionally,
we are evaluating loans that migrate to a risk class 6 status and provide for
possible losses if the loan is unsecured or secured by a General Security
Agreement on business assets.
The
predetermined allowance percentages to be applied to loans possessing risk grade
1 through 6 are determined by using the historical charge-off percentages and
adding management’s qualitative factors. For each individual loan
type, we calculate the average historical charge-off percentage over a five year
period. The current year charge-offs are annualized and included as
one of the five years under consideration. The resulting averages
represent a charge-off in a more normalized environment. To those
averages, management adds qualitative factors which are more a reflection of
current economic conditions and trends. Together, these two
components comprise the reserve.
- 35 -
Those
loans that are identified through the Company’s internal loan grading system as
impaired are evaluated individually. Each loan is analyzed to
determine the net value of collateral, probability of charge-off and finally a
potential estimate of loss. When management believes a real estate
collateral-supported loan will move from a risk grade 6 to a risk grade 7, a new
appraisal is ordered. The analysis is performed using current
collateral values as opposed to values shown on appraisals which were obtained
at the time the loan was made. If the analysis of a real estate
collateral-supported loan results in an estimated loss, a specific reserve is
recorded. Loans with risk grade 7 and 8 are re-evaluated periodically
to determine the adequacy of specific reserves. Fair values on real
estate collateral are subject to constant change and management makes certain
assumptions about how the age of an appraisal impacts current
value. Loans with risk grade codes of 7 or 8 that are either
unsecured or secured by a general security agreement on business assets are
generally reserved for at 100% of the loan balance.
Using the
data gathered during the monthly evaluation process, the model calculates an
acceptable range for allowance for loan losses. Management and the
Board of Directors are responsible for determining the appropriate level of the
allowance for loan losses within that range.
The
provision for the first nine months of 2009 was primarily the result of credit
quality deterioration due to the current economic conditions in our
markets. The sectors of the loan portfolio being impacted most by the
economic climate are residential construction and land acquisition and
development. Other factors influencing the provision include net loan
charge-offs. For the nine-month period ended September 30, 2009,
there were net loan charge-offs of $3.6 million compared with $2.5 million at
September 30, 2008. The allowance for loan losses at September 30,
2009 was $13.8 million, which represents 1.79% of total loans outstanding
compared to $10.0 million or 1.30% as of September 30, 2008.
The
allowance for loan losses represents management’s estimate of an amount adequate
to provide for known and inherent losses in the loan portfolio in the normal
course of business. While management believes the methodology used to
establish the allowance for loan losses incorporates the best information
available at the time, future adjustments to the level of the allowance may be
necessary and the results of operations could be adversely affected should
circumstances differ substantially from the assumptions initially
used. We believe that the allowance for loan losses was established
in conformity with generally accepted accounting principles; however, there can
be no assurances that the regulatory agencies, after reviewing the loan
portfolio, will not require management to increase the level of the
allowance. Likewise, there can be no assurance that the existing
allowance for loan losses is adequate should there be deterioration in the
quality of any loans or changes in any of the factors discussed
above. Any increases in the provision for loan losses resulting from
such deterioration or change in condition could adversely affect our financial
condition and results of operations.
The
following table describes the allocation of the allowance for loan losses among
various categories of loans for the dates indicated. The changes in
percentage of total loans reflect the reclassifications of loans during the
conversion previously discussed.
- 36 -
Allocation
of Allowance for Loan Losses
At
September 30,
|
At
December 31,
|
|||||||||||||||
2009
|
2008
|
|||||||||||||||
%
of Total
|
%
of Total
|
|||||||||||||||
Amount
|
Loans
(1)
|
Amount
|
Loans
(1)
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Residential
real estate loans
|
$ | 1,133 | 12.36 | % | $ | 103 | 11.43 | % | ||||||||
Home
equity loans and lines
|
1,247 | 8.09 | % | 469 | 8.11 | % | ||||||||||
Commercial
mortgage loans
|
3,557 | 46.21 | % | 6,003 | 38.89 | % | ||||||||||
Construction
loans
|
5,166 | 23.19 | % | 3,694 | 30.87 | % | ||||||||||
Commercial
and industrial loans
|
2,441 | 9.52 | % | 1,953 | 10.30 | % | ||||||||||
Loans
to individuals
|
238 | 0.63 | % | 363 | 0.40 | % | ||||||||||
Total
allowance
|
$ | 13,782 | 100.00 | % | $ | 12,585 | 100.00 | % |
(1)
|
Represents
total of all outstanding loans in each category as a percent of total
loans outstanding. Percentages for December 31, 2008 have been changed to
reflect the reclassification previously
discussed.
|
- 37 -
The
following table presents information regarding changes in the allowance for loan
losses for the periods indicated:
Changes
in Allowance for Loan Losses
For the Nine-Month Period Ended September
30,
|
||||||||
2009
|
2008
|
|||||||
(Dollars
in thousands)
|
||||||||
Balance
at the beginning of the year
|
$ | 12,585 | $ | 8,273 | ||||
Charge-offs:
|
||||||||
Commercial
and industrial loans
|
1,205 | 167 | ||||||
Commercial
real estate loans
|
- | 91 | ||||||
Construction,
acquisition and development
|
1,736 | 569 | ||||||
Residential
mortgage loans
|
721 | - | ||||||
Home
equity lines and loans
|
195 | - | ||||||
Consumer
loans
|
76 | 17 | ||||||
Total
charge-offs
|
3,933 | 844 | ||||||
Recoveries
|
||||||||
Commercial
and industrial loans
|
65 | 9 | ||||||
Commercial
real estate
|
- | 3 | ||||||
Construction,
acquisition and development
|
269 | - | ||||||
Residential
mortgage loans
|
9 | - | ||||||
Consumer
loans
|
- | - | ||||||
Total
recoveries
|
343 | 12 | ||||||
Net
charge-offs
|
3,590 | 832 | ||||||
Provision
for loan losses
|
4,787 | 2,547 | ||||||
Balance
at the end of the period
|
$ | 13,782 | $ | 9,988 | ||||
Total
loans outstanding at period-end
|
$ | 771,997 | $ | 769,090 | ||||
Average
loans outstanding for the period
|
$ | 781,311 | $ | 728,901 | ||||
Allowance
for loan losses to total loans outstanding
|
1.79 | % | 1.30 | % | ||||
Annualized
ratio of net charge-offs to average loans outstanding
|
0.61 | % | 0.15 | % |
LIQUIDITY
AND CAPITAL RESOURCES
Maintaining
adequate liquidity while managing interest rate risk is the primary goal of the
Company’s asset and liability management strategy. Liquidity is the ability to
fund the needs of the Company’s borrowers and depositors, pay operating
expenses, and meet regulatory liquidity requirements. Maturing investments, loan
and mortgage-backed security principal repayments, deposit growth, brokered time
deposits and borrowings from the Federal Home Loan Bank, Federal Reserve Bank
and other correspondent banks are presently the main sources of the Company’s
liquidity. The Company’s primary uses of liquidity are to fund loans and to make
investments.
- 38 -
As of
September 30, 2009, liquid assets (cash and due from banks, interest-earning
deposits with banks, fed funds sold and investment securities available for
sale) were approximately $227.9 million, which represents 21% of total assets
and 32% of total deposits. Supplementing this liquidity, the Company has
available lines of credit from various correspondent banks of approximately
$473.5 million of which $206.0 million is outstanding at September 30,
2009. Outstanding commitments for undisbursed lines of credit,
letters of credit and undisbursed investment commitments amounted to
approximately $151.3 million. Management intends to fund anticipated
loan closings and operational needs through cash and cash equivalents on hand,
brokered deposits, scheduled principal repayments from the loan and securities
portfolios, and anticipated increases in deposits and
borrowings. Certificates of deposit represented 61% of the Company’s
total deposits at September 30, 2009 and 65% at December 31, 2008. The Company’s
growth strategy will include marketing efforts focused at increasing the
relative volume of transaction deposit accounts; however, time deposits will
continue to play an important role in the Company’s funding strategy.
Certificates of deposit of $100,000 or more represented 49% and 50% of the
Company’s total deposits at September 30, 2009 and December 31, 2008,
respectively. While these deposits are generally considered rate
sensitive and the Company will need to pay competitive rates to retain these
deposits at maturity, there are other subjective factors that will determine the
Company’s continued retention of those deposits.
Under
federal capital regulations, Crescent Financial Corporation must satisfy certain
minimum leverage ratio requirements and risk-based capital requirements. At
September 30, 2009, the Company’s equity to asset ratio is
11.61%. The Company’s ratios of Tier 1 capital to risk-weighted
assets and total capital to risk-based assets are 11.49% and 13.64%,
respectively. The bank subsidiary is required to maintain capital
adequacy ratios. Crescent State Bank has Tier I capital to
risk-weighted assets and total capital to risk-based assets ratios of 10.34% and
12.48%, respectively.
IMPACT
OF INFLATION AND CHANGING PRICES
A
commercial bank has an asset and liability composition that is distinctly
different from that of a company with substantial investments in plant and
inventory because the major portions of its assets are monetary in nature. As a
result, a bank’s performance may be significantly influenced by changes in
interest rates. Although the banking industry is more affected by changes in
interest rates than by inflation in the prices of goods and services, inflation
is a factor that may influence interest rates. However, the frequency and
magnitude of interest rate fluctuations do not necessarily coincide with changes
in the general inflation rate. Inflation does affect operating expenses in that
personnel expenses and the cost of supplies and outside services tend to
increase more during periods of high inflation.
FORWARD-LOOKING
INFORMATION
This
quarterly report to stockholders may contain, in addition to historical
information, certain “forward-looking statements” that represent management’s
judgment concerning the future and are subject to risks and uncertainties that
could cause the Company’s actual operating results and financial position to
differ materially from those projected in the forward-looking
statements. Such forward-looking statements can be identified by the
use of forward-looking terminology such as “may,” “will,” “expect,”
“anticipate,” “estimate” or “continue” or the negative thereof or other
variations thereof or comparable terminology. Factors that could influence the
estimates include changes in national, regional and local market conditions,
legislative and regulatory conditions, and the interest rate
environment.
- 39 -
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
The
Company’s primary market risk is interest rate risk. Interest rate risk is the
result of differing maturities or repricing intervals of interest earning assets
and interest bearing liabilities and the fact that rates on these financial
instruments do not change uniformly. These conditions may impact the earnings
generated by the Company’s interest earning assets or the cost of its interest
bearing liabilities, thus directly impacting the Company’s overall earnings. The
Company’s management actively monitors and manages interest rate risk. One way
this is accomplished is through the development of and adherence to the
Company’s asset/liability policy. This policy sets forth management’s strategy
for matching the risk characteristics of the Company’s interest earning assets
and liabilities so as to mitigate the effect of changes in the rate environment.
The Company’s market risk profile has not changed significantly since December
31, 2008.
Item 4T. Controls and
Procedures
Crescent
Financial Corporation’s management, with the participation of the Chief
Executive Officer and Principal Financial Officer, has evaluated the
effectiveness of the Company’s disclosure controls and procedures as of
September 30, 2009. Based on that evaluation, the Company’s Chief Executive
Officer and Principal Financial Officer concluded that the Company’s disclosure
controls and procedures were effective, as of September 30, 2009, to provide
reasonable assurance that information required to be disclosed by the Company in
the reports filed or submitted by it under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and to provide reasonable assurance that information
required to be disclosed by the Company in such reports is accumulated and
communicated to the Company’s management, including its principal executive
officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
The
Company assesses the adequacy of its internal control over financial reporting
quarterly and enhances its controls in response to internal control assessments
and internal and external audit and regulatory recommendations. There have been
no changes in the Company’s internal controls during the quarter ended September
30, 2009 or through the date of this Quarterly Report on Form 10-Q that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
- 40 -
Part
II.
|
OTHER
INFORMATION
|
Item
1.
|
Legal
Proceedings.
|
|
None
that are material.
|
Item
1a.
|
Risk
Factors.
|
|
Not
Applicable.
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds.
|
|
None.
|
Item
3.
|
Defaults
Upon Senior Debt.
|
|
None.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
|
None.
|
Item
5.
|
Other
Information.
|
|
None.
|
Item
6.
|
Exhibits
|
(a)
|
Exhibits.
|
10.25
|
Amended
And Restated Director’s Compensation
Plan
|
31.1
|
Certification
of Principal Executive Officer pursuant to Rule 13a –
14(a)
|
31.2
|
Certification
of Principal Financial Officer pursuant to Rule 13a –
14(a)
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
- 41 -
SIGNATURES
Under the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CRESCENT
FINANCIAL CORPORATION
|
||
Date: November
10, 2009
|
By:
|
/s/ Michael G.
Carlton
|
Michael
G. Carlton
|
||
President
and Chief Executive Officer
|
||
Date: November
10, 2009
|
By:
|
/s/ Bruce W. Elder
|
Bruce
W. Elder
|
||
Principal
Financial Officer
|
- 42 -